Potential Output : A Market Conditionalities Interpretation

The measurement of potential output has been addressed in economics from the supply- and demand-side perspectives. The purpose of this study was to deepen the latter interpretation, focusing on market conditionalities and providing a macro-model (EUMOD21) as a computational tool. This empirical research was conducted using the statistical databases of the European Union (EU) for the period 1996–2019. The potential output estimations obtained with the proposed methodology are compared with those computed by the EU-DGFIN using the production function method (close to the supply-side vision). Both sets of estimates are grounded in the same socio-economic background. However, they differ due to the inherent temporary misalignments between the supply-side and demandside market impulses and to possible measurement discrepancies. None of these estimations appear to be optimal, and they may be looked at as Marshallian scissors. The true potential output seems to be linked to both perspectives and should be approximated by taking both of them into account. Quantitatively, this may be obtained by adopting different averaging algorithms