Showing papers on "Potential output published in 2005"

Assessing Potential Output Growth in the Euro Area: A Growth Accounting Perspective

Abstract: For monetary policy purposes it is useful to apply a concept of potential output growth that looks through the fluctuations inherent in most model based estimates. Growth accounting can be a useful tool in this respect, given its focus on average developments in real GDP growth and supply side factors over medium to longer-term horizons. This paper describes the assumptions and measurement issues underlying the growth accounting framework and applies it to euro area data for the period 1980 to 2003. It shows that growth in measured total factor productivity has been the single most important contributor to real GDP growth over this period. However, the contribution to growth from this factor declined between the 1980s and the 1990s, while that from labour increased. Looking forward, the projected demographic developments imply a reduction in average real GDP growth in the coming decades unless compensation is achieved from other supply-side factors.

Welfare Implications of Joining a Common Currency

Abstract: This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries' supply shocks and the larger the variance of real exchange rate shocks.

Assessing potential output growth in the euro area - a growth accounting perspective

Abstract: For monetary policy purposes it is useful to apply a concept of potential output growth that looks through the fluctuations inherent in most model based estimates. Growth accounting can be a useful tool in this respect, given its focus on average developments in real GDP growth and supply side factors over medium to longer-term horizons. This paper describes the assumptions and measurement issues underlying the growth accounting framework and applies it to euro area data for the period 1980 to 2003. It shows that growth in measured total factor productivity has been the single most important contributor to real GDP growth over this period. However, the contribution to growth from this factor declined between the 1980s and the 1990s, while that from labour increased. Looking forward, the projected demographic developments imply a reduction in average real GDP growth in the coming decades unless compensation is achieved from other supply-side factors.

GDP Growth, Potential Output, and Output Gaps in Mexico

Abstract: This paper analyzes the sources of Mexico's economic growth since the 1960s and compares various decompositions of historical growth into its trend and cyclical components. The role of the implied output gaps in the inflationary process is then assessed. Looking ahead, the paper presents medium-term paths for GDP based on alternative assumptions for productivity growth rates. The results indicate that the most important factor underlying the slowdown in output growth was a decline in trend total factor productivity growth. Economic policy reforms and the introduction of NAFTA may have raised trend productivity growth in recent years. Further increases in productivity growth would appear necessary, however, to raise medium-term growth.

Economic Growth in Post-Apartheid South Africa: A Growth-Accounting Analysis

Abstract: This chapter examines South Africa’s growth performance since 1994 within a growth-accounting framework, and assesses growth prospects going forward.1 Near-term prospects can be captured by potential output growth and the output gap (the difference between actual and potential output). Together with other indicators, this can provide an indication of the intensity of resource utilization and inflationary pressures.2 Longerterm growth prospects can be assessed on the basis of the full utilization of factors of production and the output gains that arise as these factors are

Non-Discretionary and Automatic Fiscal Policy in the EU and the OECD

Abstract: Official adjustments of the budget balance to the cycle merely assume that the only category of government spending that responds automatically to the cycle is unemployment compensation. But estimates show otherwise. Payments for pensions, health, subsistence, invalidity, childcare and subsidies of all sorts to firms respond automatically and significantly to the cycle as well. In addition, it is fairly common to borrow official figures for cyclically adjusted budget balances, divide by potential output, and then use the resulting ratios to study discretionary fiscal policy. But if potential output is not deterministic but subject to supply shocks, then apart from anything else, those ratios are inefficient estimates of the cyclically-independent ratios of budget balances divided by potential output. (A fortiori, they are inefficient estimates of the cyclically adjusted ratios of budget balances to observed output.) Accordingly, the paper provides separate estimates of the impact of the cycle on the levels of budget balances and the ratios of budget balances to output. In addition, it discusses the relation between the two sorts of estimates. When the focus is on ratios of budget balances to output, the cyclical adjustments depend more on inertia in government spending on goods and services than they do on taxes (which are largely proportional to output). But they depend even still more on transfer payments. Besides calling for different series for discretionary fiscal policy if ratios serve, these results also raise questions about the general policy advice to 'let the automatic stabilizers work'.

GDP Growth, Potential Output, and Output Gaps in Mexico

Abstract: This paper analyzes the sources of Mexico's economic growth since the 1960s and compares various decompositions of historical growth into its trend and cyclical components. The role of the implied output gaps in the inflationary process is then assessed. Looking ahead, the paper presents medium-term paths for GDP based on alternative assumptions for productivity growth rates. The results indicate that the most important factor underlying the slowdown in output growth was a decline in trend total factor productivity growth. Economic policy reforms and the introduction of NAFTA may have raised trend productivity growth in recent years. Further increases in productivity growth would appear necessary, however, to raise medium-term growth.

Estimating Output Gap for the Turkish Economy

Abstract: This paper presents a time-varying parameter methodology for constructing an estimate of output gap for Turkey. We employ the extended Kalman filter technique in a multivariate setting in which economic content is utilized by the inclusion of inflation and output gap dynamics. As a by-product, we characterize time varying nature of output gap and inflation dynamics. Several results emerge: First, we show that estimating the potential output and output gap in a multivariate setting has several advantages over univariate techniques such as the HP filter. Second, our output gap estimates confirm the historical boom-bust cycles in Turkey and point out that business cycle displays sharp turning points rather than exhibiting a smooth pattern. Third, output gap seems to have contributed dramatically to the disinflation process in 2002-2004. Fourth, estimated time varying parameters suggest that, recently, the relation between real interest rates and the output gap seems to have been converging to a more conventional one. What is more, relative impact of output gap on inflation dynamics has been rising since 2001. Putting aside the “fiscal dominance” argument, these latter findings bode well for the effectiveness of the monetary policy within the prospective inflationtargeting framework.

Keynesian Economics, Monetary Policy and the Business Cycle - New and Old

Abstract: After a brief review of the main differences between New and Old Keynesian economics from the 1960s this paper focuses on a tension between traditional sluggish measures of potential output commonly used by policy-makers and the New Keynesian (NK) notion of this variable which conceptualizes it as the level of output that would have been produced under perfect competition had all prices and wages been flexible. The paper shows that, under monopolistic competition, NK potential output is often more volatile than the level of output produced under sticky prices and wages implying either of the following. Real life policy-makers mistakenly target smooth versions of output or (since actual economies are monopolistically rather than perfectly competitive) the flexible price and wage equilibrium does not necessarily maximize welfare. The paper shows, that depending on the shape of the utility function and of the distribution of productivity shocks either case is possible and proposes a criterion for discriminating between them.

Keynesian Economics, Monetary Policy and the Business Cycle – New and Old

Abstract: After a brief review of the main differences between New and Old Keynesian economics from the sixties this paper focuses on a tension between traditional sluggish measures of potential output commonly used by policymakers and the New Keynesian (NK) notion of this variable which conceptualizes it as the level of output that would have been produced under perfect competition had all prices and wages been flexible. The paper shows that, under monopolistic competition, NK potential output is often more volatile than the level of output produced under sticky prices and wages implying either of the following. Real life policymakers mistakenly target smooth versions of output or (since actual economies are monopolistically rather than perfectly competi- tive) the flexible price and wage equilibrium does not necessarily maximize welfare. The paper shows, that depending on the shape of the utility function and of the distribu- tion of productivity shocks either case is possible and proposes a criterion for discrimi- nating between them. (JEL E3, E4, E5, E6)

Estimating Potential Output: a Survey of the Alternative Methods and their Applications to Brazil

Abstract: This paper presents the main issues involved in estimating potential output. Theobjective is to describe the alternative methods and analyze their application andimplications for growth forecasts and macroeconomic policy in Brazil. The textemphasizes the determinants of potential output under fixed and flexible coefficientsof production. Given the wide use of aggregate measures of Total Factor Productivityin growth accounting, and the sensitivity of such a variable to economic assumptionsand errors of measurement, the text also presents the main applied critiques andalternatives to aggregate growth-accounting exercises. The main conclusions are: i)the annual potential growth rate of Brazil?s Gross Domestic Product (GDP) variessubstantially depending on the method and hypotheses adopted and, what is mostimportant, potential GDP is not separable from effective GDP in the long-run; ii)growth-accounting and time-series studies of Brazil result in low potential-outputgrowth rates because they extrapolate the slow growth of 1981-2003 to the future;iii) capital seems to be the main constraint on growth in Brazil and, therefore, ademand-led increase in investment can raise both its effective and potential outputlevels; iv) however, because of the slow adjustment of the capital stock, an investmentboom can also hit a supply constraint before the stock of capital has time to adjust tothe growth rate of investment; and v) aggregate measures of potential output do notcarry much information about the economy and, therefore, they should becomplemented by sectoral estimates of capacity utilization to identify the bottlenecksin inter-industry flows and the corresponding demand pressures on inflation.

Potential output in the czech republic: a pro- duction function approach *

Abstract: This paper deals with the Czech economy supply side performance from the macroeconomic point of view. In order to evaluate the supply side behaviour we calculate the potential output dynamic path and contribution of its particular determinants using the production function method. The results show that the potential output growth was rather slow around 2 per cent. This implies that e. g. even 3 per cent growth can cause macroeconomic imbalances. Increase of the non-accelerating-inflation-rate of unemployment (NAIRU), weak growth of the capital stock and weak growth of total factor productivity appear to be the reasons for the constrained ability of the Czech economy to grow steadily and converge to EU level.

Hooverism, Hyperstabilisation or Halfway-House? Describing Fiscal Policy in Central and Eastern European EU Members

Abstract: This paper develops a simple framework for describing fiscal policy where policymakers attempt to minimise deviations in output and budget balance from target values. Optimal policy is given by minimising a quadratic loss function subject to a linear structure of the economy. This policy can be viewed as weighted average of two polar cases - the case where the budget deficit adjusts to eliminate any deviations from potential output (hyperstabilisation), and the case where taxes and spending are determined exclusively by some budgetary goal (hooverism). We find some evidence of stabilisation for Poland, Latvia and Estonia. There is no evidence for the Czech Republic, Lithuania, Slovakia and Slovenia, suggesting that fiscal policy was being used for other objectives. The best fit is for Estonia, suggesting that a strict fiscal policy environment may not be incompatible with stabilising fiscal policy.

Measuring Potential Output and Output Gap and Macroeconomic Policy: The Case of Kenya

Abstract: Measuring the level of an economy.s potential output and output gap are essential in identifying a sustainable non-inflationary growth and assessing appropriate macroeconomic policies. The estimation of potential output helps to determine the pace of sustainable growth while output gap estimates provide a key benchmark against which to assess inflationary or disinflationary pressures suggesting when to tighten or ease monetary policies. These measures also help to provide a gauge in the determining the structural fiscal position of the government. This paper attempts to measure Kenya.s potential output and output gap using alternative statistical techniques and structural methods. Estimation of potential output and output gap using these techniques shows varied results. The estimated potential output growth using different methods gave a range of .2.9 to 2.4 percent for 2000 and a range of .0.8 to 4.6 for 2001. Although various methods produce varied results, they however provided a broad consensus on the over-all trend and performance of the Kenyan economy. This study found that firstly, potential output growth is declining over the recent time and secondly, the Kenyan economy is contracting in the recent years.

Welfare implications of joining a common currency

Abstract: This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries’ supply shocks and the larger the variance of real exchange rate shocks. JEL Classification: E52, E58, F33, F40

Potential Output Estimations for Hungary: A Survey of Different Approaches

Abstract: This paper is a comprehensive analysis of Hungary’s potential output. Since the concept of potential output is not unique, we present various interpretations of potential GDP, along with a large set of techniques for estimating it. Various estimates are presented and robustness analyses are performed. Finally, an illustrative scenario is outlined for the forthcoming few years.

How the Bundesbank really conducted monetary policy

Abstract: Papers estimating the reaction function of the Bundesbank generally find that ist monetary policy from the 1970s to 1998 can well be captured by a standard Taylor rule according to which the central bank responds to the output gap and to deviations of inflation from target, but not to monetary growth. This result is at odds with the Bundesbank´s claim that it followed a strategy of monetary targeting. This paper analyses whether this apparent contradiction is due to (a) the use of ex post data which do not necessarily match policy makers’ real-time information sets and (b) the omission of important explanatory variables. Accordingly, we compile a real-time data set for Germany including the Bundesbank’s own estimates of potential output and use it to reestimate the Bundesbank’s reaction function. We find that the use of real-time data considerably changes the results. Moreover, when adding the change in the output gap as well as deviations of money growth from target to the set of explanatory variables, we find that both variables are highly significant. This suggests that the Bundesbank took its monetary targets seriously, but also responded to deviations of expected inflation and output growth from target

Technical Efficiency in the Iron and Steel Industry: A Stochastic Frontier Approach

Abstract: In this paper we examine the technical efficiency of firms in the iron and steel industry and try to identify the factors contributing to the industry's efficiency growth, using a time-varying stochastic frontier model. Based on our findings, which pertain to 52 iron and steel firms over the period of 1978-1997, POSCO and Nippon Steel were the most efficient firms, with their production, on average, exceeding 95 percent of their potential output. Our findings also shed light on possible sources of efficiency growth in the industry. If a firm is government-owned, its privatization is likely to improve its technical efficiency to a great extent. A firm's technical efficiency also tends to be positively related to its production level as measured by a share of the total world production of crude steel. Another important source of efficiency growth identified by our empirical findings is adoption of new technologies and equipment. Our findings clearly indicate that continued efforts to update technologies and equipment are critical in pursuit of efficiency in the iron and steel industry.

Some estimates of potential output and the output gap for South Africa

Abstract: This paper estimates potential output and the output gap using three methods: the statistical time trend, a Cobb-Douglas production function and the Hodrick-Prescott Filter methods. Estimates of potential output growth rate of the economy are discussed as well as contributions to growth during the period under study, using the production function method. The implied output gap estimates could prove useful in formulating macroeconomic policy in South Africa, as it may indicate underlying inflationary pressure in the economy.

Inflation, Central Bank Independence and the Legal System

Abstract: We argue that a higher degree of de facto independence of the legal system from the other government branches as well as public trust in the legal system may reduce the average inflation record of countries through a direct and an indirect channel. The direct channel works by affecting potential output, while the indirect channel helps to increase the de facto independence of the central bank. In the empirical section of the paper, we present evidence in favor of both channels in a sample containing both industrial and Third World countries. A model that contains legal trust in addition to de jure central bank independence, checks and balances within government, and openness can explain 60% of the variation in the logarithm of the inflation rate.

Univariate Potential Output Estimations for Hungary

Abstract: Potential output figures are important ingredients of many macroeconomic modelsand are routinely applied by policy makers and global agencies Despite itswidespread use, estimation of potential output is at best uncertain and dependsheavily on the model The task of estimating potential output is an even moredubious exercise for countries experiencing huge structural changes, such astransition countries In this paper we apply univariate methods to estimate andevaluate Hungarian potential output, paying special attention to structural breaksIn addition to statistical evaluation, we also assess the appropriateness of variousmethods by expertise judgement of the results, since we argue that mechanicaladoption of univariate techniques might led to erroneous interpretation of thebusiness cycle As all methods have strengths and weaknesses, we derive a singlemeasure of potential output by weighting those methods that pass both thestatistical and expertise criteria As standard errors, which might be used forderiving weights, are not available for some of the methods, we base our weightson similar but computable statistics, namely on revisions of the output gap for alldates by recursively estimating the models Finally, we compare our estimated gapswith the result of the only published Hungarian output gap measure of Darvas-Simon (2000b), which is based on an economic model

Aggregate Supply, Investment in Capacity, and Potential Output

Abstract: The New-Keynesian aggregate supply derives from micro-foundations, an inflation-dynamics model very much like the tradition in the monetary literature. Inflation is primarily affected by: (1) economic slack, (2) expectations, (3) supply shocks, and (4) the persistence of inflation. This paper extends the New-Keynesian aggregate supply relationship to include also investment in capacity. Potential output, defined as the flexible-price equilibrium output depends endogenously on investment in capacity, on the pricing policy of firms. New-Keynesian theory stresses the notion that the pricing decisions are based on expected movements in marginal costs. In the absence of investment in capacity, inflation is related to movements in real marginal costs, and the latter is uniquely associated with movements in the output gap. In the presence of investment in capacity, the unique link between fluctuations in marginal costs and fluctuations in output gaps breaks down. Implications for central bank targeting of potential output and for the estimation of the Phillips curve are pointed out.

Estimating potential output: a survey of the alternative methods and their applications to brazil

Abstract: This paper presents the main issues involved in estimating potential output. The objective is to describe the alternative methods and analyze their application and implications for growth forecasts and macroeconomic policy in Brazil. The text emphasizes the determinants of potential output under fixed and flexible coefficients of production. Given the wide use of aggregate measures of total factor productivity in growth accounting, and the sensitivity of such a variable to economic assumptions and errors of measurement, the text also presents the main applied critiques and alternatives to aggregate growth-accounting exercises. The main conclusions are: (1) the annual potential growth rate of Brazil’s GDP varies substantially depending on the method and hypotheses adopted and, what is most important, potential GDP is not separable from effective GDP in the long-run; (2) growth-accounting and time-series studies of Brazil result in low potential-output growth rates because they extrapolate the slow growth of 1981-2003 to the future; (3) capital seems to be the main constraint on growth in Brazil and, therefore, a demand-led increase in investment can raise both its effective and potential output levels; (4) however, because of the slow adjustment of the capital stock, an investment boom can also hit a supply constraint before the stock of capital has time to adjust to the growth rate of investment; and (5) aggregate measures of potential output do not carry much information about the economy and, therefore, they should be complemented by sectoral estimates of capacity utilization to identify the bottlenecks in inter-industry flows and the corresponding demand pressures on inflation.

Unobserved components methods to estimate potential gdp (the case of romania)

Abstract: The estimation of potential output gap is useful for the identification of a sustainable growth rate without inflationary pressures. In order to derive the potential output decomposition statistical methods and structural relationships estimation methods are used. The former tries to separate a series into a permanent and a cyclical component, and the latter tries to isolate the structural and cyclical influences upon the aggregate output using the economic theory. In order to estimate the potential GDP for the Romanian economy I applied only models with unobserved components.

Estimating the potential output of the euro area with a semi-structural multivariate Hodrick-Prescott filter

Abstract: In this paper, we develop an analytical framework for the estimation of potential output and output gaps for the euro area combining multivariate filtering techniques with the production function approach. The advantage of this methodology lies in the fact that it combines a model based approach to explicit statistical assumptions concerning the estimation of the potential values of the components of the production function. We discuss the production function approach and the main issues raised by this approach. We then present the main empirical studies which have estimated production function based output gaps with multivariate filtering techniques. The production function approach will be implemented with Multivariate Hodrick-Prescott filters (HPMV). The advantage of the multivariate production function approach will also be assessed through using a variety of statistical criteria