Historical Positions and Controversies
Chapter 2 chronologically surveyed the development of the concepts of “potential output” and “output gaps” in macroeconomic theories. The present chapter examines key problems in four areas related to these concepts. The first area concerns the problem of aggregation. Since estimations based on economic theory mostly rest on the idea of a macroeconomic production function, we assess the explanatory power of macroeconomic aggregates within the concept of potential output (section 3.2). The second problem area pertains to the relationship between the growth trend and the business cycle. This primarily concerns the question to what extent the short run and the long run can be separated strictly according to the common dichotomy of demand and supply influences (section 3.3). The notion of non-inflationary unemployment constitutes the third problem area. Its implications for economic policy are pointed out by means of highlighting the differences between the concepts of the natural rate of unemployment, the NAIRU and the QUERU (section 3.4). The last problem area relates to the role of monetary policy. Concerning this matter, the interaction between the progression of potential output and monetary policy is discussed. While chapter 2 presented the subject in the sense of a longitudinal section over time, chapter 3 forms an analytical cross-section: The assumptions and concepts invoked today in determining potentials and gaps are confronted with theoretical positions advocated at different points in time. Accordingly, the present chapter contains résumés concerning the above-mentioned four matters that can be drawn from the theories presented in chapter 2. Where necessary, we establish cross connections to other contributions made in the history of economic theory.
KeywordsInterest Rate Monetary Policy Business Cycle Capital Stock Potential Output
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