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A sectoral approach to measuring output gap: Evidence from 20 US Sectors over 1948−2020

Published online by Cambridge University Press:  26 April 2022

Remzi Baris Tercioglu
Remzi Baris Tercioglu*
Affiliation:
New School for Social Research
*
E-mail: tercr677@newschool.edu
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Abstract

The existing output gap measures for the US economy rely on aggregate data and assume a constant output gap over sectors (see Coibion et al. [(2018) Brookings Papers on Economic Activity, 333–441] and Owyang et al. [(2018) Federal Reserve Bank of St. Louis Review, 297–316]); however, each sector has its cycle, which does not necessarily match the business cycle (Burns and Mitchell [(1946) National Bureau of Economic Research]). By modeling sectoral cycles based on their investment cycles with a nonparametric method, I estimate output gaps of 20 US sectors over 1948–2020. The weighted mean output gap indicates a persistent spare capacity in the last business cycle, pointing to insufficient stabilization policies behind secular stagnation. Phillips curve estimations with the weighted quartiles of sectoral output gaps show that the output gap of bottleneck sectors (weighted Q3) is correlated strongly with inflation over 1950–2020. Policymakers can track bottleneck sectors to mitigate inflationary pressures while supporting the sectors with negative output gaps to stabilize the output at its potential. My findings show that it is possible to produce more output by sector-level demand supporting policies without generating inflation.

Keywords

Business CyclesSectoral Output GapPhillips CurveSecular StagnationE32E60
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 4 , June 2023 , pp. 1115 - 1137
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

*

This paper is a part of my PhD dissertation research at the New School for Social Research. I would like to thank Duncan Foley, Mark Setterfield, Teresa Ghilarducci, Michalis Nikiforos, Christian Schoder, Brian Hartley, anonymous referees of this journal, and participants of the 47th Annual Conference of the Eastern Economic Association for their valuable comments and feedback. The usual disclaimer applies.

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