Last but not least, in the New-Keynesian framework, potential output is an even more complex concept and very different from the de-trended measures popular in current empirical work. Potential output here refers to the output level that would prevail when all distortions – be they static or dynamic – were absent.
6 Not going into the details it is clear that potential output is then influenced by a host of shocks hitting the economy. It is thus much less smooth over time than a figure calculated by applying a statistical filtering method.