This paper provides a detailed description of Danmarks Nationalbank's current methodology for estimating potential output and output gaps in the Danish economy. Although the general framework is similar to the previous production function approach in Andersen and Rasmussen (2011), each of the individual sub-models for the participation rate, unemployment and total factor productivity have been revised. First, the new approach to modelling the structural participation rate explicitly incorporates demographic variation across age groups, student propensity and a discouraged worker effect. Second, the estimation of structural unemployment now uses a wage Phillips curve rather than the wage share, since the latter is prone to substantial data revisions. Finally, an unobserved components model based on the degree of spare capacity in manufacturing is formulated for the total factor productivity (TFP) gap, thereby replacing the former extended HP filter. The results suggest that the Danish economy is operating very close to its cyclically neutral capacity in 2016. The overall view on the output gap is thus unchanged.
