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d line is given in 2005 dollars and the blue line is given in dollars from 2000 i have to fix the base year again here are price index numbers for the gdp deflator i ll convert everything to 2009 dollars graph 2 potential gdp 2005 estimate blue and 2013 estimate red in base 2009 dollars that s more like it the two estimates are pretty much the same until the 2013 estimate starts factoring the global financial crisis into the numbers now let me add to the graph two series for real gdp i ll add the most recent data which is already in 2009 dollars and i ll add the last data before the comprehensive revision of 2013 converting it from 2005 dollars to 2009 dollars graph 3 rgdp before revision orange and after revision green added to graph 2 hard to see much everything is too small and faint here i cropped off everything before 1990 made the lines heavier and made the text smaller graph 4 enlarged detail from graph 3 the blue and orange lines show the output gap before the numbers were revised the red and green lines show the output gap after the numbers were revised the blue line shows an estimate of potential output from before the financial crisis the red line shows the newest estimate after several downward revisions the orange line shows rgdp before the revision but in 2009 dollars the green line shows rgdp after the revision also in 2009 dollars the revision pushed rgdp up just enough to make it line up with the new lower estimate of potential gdp red the high and low lines blue and orange together show the output gap that developed since 2008 the red and green lines show the output gap after they reworked the numbers posted by the arthurian at 4 00 am 0 comments friday november 29 2013 the output gap closes in 2014 enlarged portion of yesterday s graph thursday s post left me with questions at right in the enlarged detail of yesterday s graph note that the most recent values for potential gdp line up nicely with the real gdp values in black where the black line ends a remarkable coincidence isn t it it s almost like they planned it gradually lowering their estimate of potential output and at the same time having that very nice comprehensive revision that pushed rgdp up almost like they planned it couldna ben musta benna coincidence below is an alfred graph showing the most recent potential gdp red and the last set of rgdp values from before the revision both in 2005 dollars rgdp switched from 2005 dollars to 2009 dollars in the comprehensive revision of 2013 but potential gdp was left in 2005 dollars so at fred the two series are not directly comparable graph 1 current potential gdp red and the last rgdp given in 2005 dollars relative to potential gdp the blue rgdp here is still much lower than the black rgdp in the enlarged view from yesterday s graph significantly lower i went back to fred and checked the current version of potential gdp is the 2013 02 05 version it s the same version in the alfred graph and in the clip from yesterday s graph so it s not potential gdp that s different it is real gdp that differs in the two pictures i m wondering why and i have a thought i think it s because of the other changes to rgdp that were made during the comprehensive revision the changes other than changing the base year i have some notes on the revision here i see a note on the fred gdppot page the cbo source of the potential gdp data does not have the necessary data to complete the rebasing of the gdp projections the data availability have been even more delayed due to government shutdown the next issue of the budget and economic outlook will be published in early 2014 wow i never saw fred make excuses before but that s okay i can do the rebasing right now let me take graph 1 and add the incompatible rgdp to it in green graph 2 the latest data for rgdp base year 2009 green added to graph 1 the green line shows 2009 dollars which were worth a little less than 2005 dollars to buy a given amount of stuff it takes more 2009 dollars than 2005 dollars that s why the green line runs higher than the blue line but really the green line shouldn t even be on the same graph with the red and blue lines because the dollars are not the same if you make graphs you have to watch for things like that in what follows i make the dollars the same i was saying i had a thought maybe the difference in rgdp is due to the comprehensive revision of 2013 or maybe it is due to some error in the way i converted between base years for yesterday s graph here s what i did take each rgdp value it is expressed in 2009 dollars divide the 2009 price level out of it and multiply the 2005 price level into it now it is expressed in 2005 dollars that s how i always do it maybe i always do it wrong that s something i would want to know i ll do the conversion again i need the deflator numbers for 2005 and 2009 the next graph shows those numbers expressed as annual values the blue bars show the average of four quarterly values the red show end of period values graph 3 average blue and end of period red deflator values 2005 2009 the data in an excel file from fred see how for the 2009 values the blue bar stops just at the 100 level and the red bar is a little off makes me think that the blue the average of quarterly values is what the professionals use when they do this kind of figuring that s what i ll use then the average for 2005 is 91 985 the average for 2009 is 100 000 to convert 2009 dollars to 2005 dollars i ll divide by 100 000 and multiply by 91 985 so for example something that cost 100 in 2009 divide by 100 multiply by 91 985 it cost 91 99 in 2005 dollars now i can take graph 2 take the green line divide out the 2009 prices and multiply in the 2005 prices that ll put everything in 2005 dollars then we can compare the green comprehensively revised rgdp and the blue pre revision rgdp and maybe see something interesting it takes a while to work up to interesting some days graph 4 like graph 3 but with the green line converted to 2005 dollars the green revised rgdp line is only a little above the blue unrevised line when both are expressed in the same dollars more interesting i did promise you interesting didn t i the most recent years of the revised rgdp now show a smooth transition to the red line representing potential gdp exactly like the black rgdp line in the enlarged view at the top of this post so i m satisfied now that i didn t mess up the base year conversion i m satisfied that the remarkable coincidence that puts rgdp and potential gdp back on the same path is something in their numbers not in mine and i m satisfied this post is now interesting graph 1 shows the last pre revision real gdp running far below the latest estimate of potential gdp leaving a massive output gap coincidence or no graph 4 shows that because of the comprehensive revision the output gap has closed enlarged detail from the click on version of graph 4 there was a comprehensive revision of economic data in 2013 in the case of real gdp certain things were added causing the number to rise meanwhile cbo has been gradually lowering their estimates of potential gdp these changes work together to reduce the size of the output gap but because the base year for rgdp changed from 2005 to 2009 and the base year for potential gdp did not change the reduced size of the output gap has been hidden from view because the two series have different base years one cannot make a simple comparison and the base year difference complicates the relation between the numbers so that an analysis is liable to discover things other than what we have discovered here today finally instead of rebasing the numbers to make the two series comparable fred offers excuses for the failure to rebase they suggest it will get done in early 2014 hey i m just a hobbyist i know but rebasing is not the same as a comprehensive revision rebasing is just a matter of changing the base year you know divide by one year s price number and multiply by another kids learn how to do that kind of arithmetic in the third grade the simple rebasing performed in this post allows us to compare the comprehensively revised rgdp and the unrevised rgdp in order to see the changes other than price changes it allows us to see the real changes in real gdp is that too much to ask this simple rebasing also allows us to compare real and potential gdp and to see that the output gap will close the moment real and potential output are expressed in terms of the same base year the output gap closes in 2014 when potential gdp is rebased because of the revisions that pushed real gdp up and potential gdp down by accident or by design recent changes to real and potential gdp bring the paths of the two lines together closing the output gap and making things normal before long then we shall again be thinking of things as normal and the present day concern with output gaps and under performing economies will all be well behind us we shall live again as happy as stepford wives and those of us who know better will have no leg to stand on posted by the arthurian at 4 00 am 1 comments thursday november 28 2013 thankfully a short one following up on mine of 26 november graph 1 rgdp black overlaid on several vintages of potential gdp the google drive spreadsheet happy thanksgiving posted by the arthurian at 4 00 am 0 comments wednesday november 27 2013 let s set our sights lower he says oh for crying out loud john b taylor moved from this blog to this one and evidently didn t bring all his old posts along so in order to re read his post of 6 feb 2012 i had to go there and quickly capture the page source before his timer timed out and deposited me at the error page this is what i wanted from johnbee s post the first chart shows real gdp during the 10 quarters since the end of the 2007 2009 recession along with cbos recently revised estimate of potential gdp the chart clearly shows that the economy has yet to recover back to its potential the only real difference from earlier assessments is that cbo has slightly lowered its estimate of potential for comparison the next chart shows the recovery back to potential in the 10 quarters following the 1981 82 recession the difference between the two charts is striking and is why one can say that the current recovery is a recovery in name only in the second graph the reagan years graph real gdp quickly works its way back up to potential gdp in the first graph it does not despite the fact that cbo has slightly lowered its estimate of potential as taylor says mmm they do that cbo they have to lower potential gdp if real gdp fails to work its way back up to potential because cbo assumes that any gap between actual gdp and potential gdp that remains at the end of the short term two year forecast will close during the following eight years the two lines have to meet in ten years so if real gdp refuses to go up potential gdp has to come down as the creepy guy in beverly hills cop said how nice john cochrane looked at taylor s graphs and said we usually bounce back to the trend line now we re not well he s right about that in a speech to the union league club of chicago pdf 6 pages james bullard said the fomc has adopted an explicit numerical inflation target this is an important development as it may prevent the u s from repeating the mistakes of the 1970s in which a misreading of the size of the output gap led the fed to maintain easy monetary policies for far too long i have argued that the large output gap benchmark in which current economic performance is continually compared to the bubble influenced mid 2000s may not be realistic instead one may want to interpret the recent u s experience as a one time permanent shock to wealth in other words bullard is saying that we shouldn t draw potential gdp way up high like it shows on the first of taylor s graphs we should draw it lower to make a reasonable target that real gdp can reach let s set our sights lower he says as taylor noted that is what s happening we looked at it yesterday posted by the arthurian at 4 00 am 0 comments tuesday november 26 2013 historical revisionism okay i got a few vintages of potential gdp from alfred going back as far as 1991 i got 1991 i got every five years from 1995 to 2010 and i got 2013 these are real values inflation adjusted values and as it turns out there are all different measures of correction for inflation used for the various vintages the readme page in the alfred file says the 1991 series uses 1982 dollars the 1995 series uses 1987 dollars the 2000 series uses 1996 dollars the 2005 series uses 2000 dollars and the 2010 and 2013 series use 2005 dollars why make it simple right the first thing i want to do is convert everything to the same dollars so that when i put them on a graph it s apples to apples i did the work in a google drive spreadsheet this time i got quarterly data but the vintage series are expressed in dollars of some year not some quarter so i m taking an average of quarterly values for each base year value that i will need i m using the current gdp deflator values to convert the vintages for example for the data given in 1982 dollars i m dividing by the 1982 value of the current deflator series and multiplying by the 2005 value of the current deflator series for data given in 1987 dollars i m dividing by the 1987 value of the current deflator series and like that so i end up with everything in 2005 dollars based on the most recent data on prices i tell you these things because my method makes sense to me but i don t know if it would make sense to economists or to others here s the graph graph 1 from the in uniform dollars sheet of this google drive spreadsheet if you have trouble telling one series from another on this graph it helps to know that the data series end in date order see how that red line splits off low and ends around the year 2000 that red line is the 1995 series and it is shadowed by the 1991 series which ends a few years earlier those two series by the way were based on economic performance and economic thinking before the macroeconomic miracle of the latter 1990s by the year 2000 evidently economists had factored the miracle years into their thinking all of the potential gdp series shown for the year 2000 and after group together at a much higher performance level than the 1991 and 1995 series were the numbers influenced by the improved economic performance i would say so yes if you put your mouse cursor on the red line and follow it back to where it joins the others you can see that the numbers changed as far back as 1982 the 1995 prediction still shows no performance improvement but the 2000 prediction shows a performance improvement that goes all the way back to 1982 the four later series that all showed improved economic performance through the 1980s and 1990s suddenly break apart in the mid 2000s you can see the little golden stub of the 2000 series in the crotch there where the others veer apart ...
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