Showing papers on "Potential output published in 2018"

The Cyclical Sensitivity in Estimates of Potential Output

Abstract: Author(s): Coibion, O; Gorodnichenko, Y; Ulate, M | Abstract: The fact that declines in output since the Great Recession have been parlayed into equivalent declines in measures of potential output is commonly interpreted as implying that output will not return to previous trends. We show that real-time estimates of potential output for the United States and other countries respond gradually and similarly to both transitory and permanent shocks to output. Observing revisions in measures of potential output therefore tells us little about whether changes in actual output will be permanent. Some alternative methodologies to estimate potential output can avoid these shortcomings. These approaches suggest a much more limited decline in potential output since the Great Recession.

Measuring potential growth with an estimated DSGE model of Japan’s economy

Abstract: In this paper, we calculate the potential output and the output gap using a Bayesian-estimated DSGE model of Japan’s economy. For bridging the gap with conventional measures, we define our measure of potential output as a component of the efficient output generated only by persistent growth rate shocks. Our potential growth displays a high degree of smoothness and moves closely with conventional measures. Moreover, the output gap from our measure of potential output shows better forecasting performance for inflation—in particular, at short horizons—than other measures of output gap.

Output Hysteresis and Optimal Monetary Policy

Abstract: We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as "output hysteresis." In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing TFP growth and generating a permanent loss in output. The origin of output hysteresis is contingent on the monetary policy rule. When the nominal interest rate is constrained at the zero lower bound, a central bank unable to commit to future policy actions suffers from "hysteresis bias": it does not offset past losses in potential output. A new policy rule that targets zero output hysteresis approximates the optimal policy by keeping output at the first-best level. Estimated structural impulse response functions for key variables align with predictions of the model. A quantitative model provides evidence of significant output hysteresis resulting from endogenous growth over the Great Recession.

An empirical test of the Post-Keynesian growth model applied to functional income distribution and the growth regime in Brazil

Abstract: The main purpose of this paper is to empirically investigate whether, between 1970 and 2008, the Brazilian economy was profit-led or wage-led. To this end, we approach a canonical post-Keynesian growth model (PKGM) to estimate certain vector autoregressive (VAR) models and perform Granger non-causality tests. Three main results are extracted from the generalized impulse-response functions provided by the VAR models. First, a positive profit-share innovation affects economic growth and capacity utilization rate, both in the same direction, suggesting a profit-led pattern. Second, a profit share shock positively affects both the ratio actual/potential output, and capital accumulation, reinforcing the previous result. Third, a capacity utilization shock is shown to positively affect both output growth and capital accumulation via the accelerator effect. On the one hand, the pairwise Granger non-causality test does not provide any evidence of causality running from profit share to economic growth or c...

Potential output and microeconomic heterogeneity

Abstract: I estimate potential output growth using a production function approach applied to individual firm-level data for Italy. The dataset includes 360,000 non-financial corporations over the period 2004-15. I compare these estimates with those obtained from aggregate data, with a view to extracting additional information on the drivers of potential output in recent years. The approach based on individual firm-level data suggests a more sluggish potential growth before the crisis and a stronger recovery afterwards; the main reason is that estimates based on aggregate data are likely to suffer from aggregation biases and endogeneity problems. I find that the contributions of labour and capital to potential output growth decline over time and that unobserved firms’ productivity explains most of the recovery after 2009; turnover has a substantial negative impact during the crisis, but a positive one afterwards. All the main economic sectors are affected by the financial crisis; potential growth in manufacturing is less damaged during the crisis and recovers afterwards; the service sector is recovering slowly, while construction firms are still not recovering.

Persistent Effects of Autonomous Demand Expansions

Abstract: The prevailing wisdom that aggregate demand shocks determine short-run cyclical fluctuations around a supply-determined equilibrium growth rate and an associated equilibrium unemployment rate (or NAIRU) has been called into question by various strands of literature over the last few decades. Specifically, a recently revived literature on hysteresis finds significant persistence in the effects of negative aggregate demand shocks. This paper aims to assess this tendency to return to a supply-determined potential output, independent of aggregate demand, after episodes of demand expansion. In line with the hysteresis literature, we assess the persistence of aggregate demand effects on key macroeconomic outcomes. However, in contrast with much of that literature, we assess whether persistence is detected also in instances of demand expansion. We study 94 episodes of demand expansion in 34 OECD countries between 1960 and 2015. We look at the sum of primary public expenditure and exports, a variable we call 'autonomous demand'. We define an expansion as a large yearly percentage increase in autonomous demand, ‘large’ meaning greater than a standard deviation above the country mean. We analyze the impact of these expansions on key macroeconomic outcomes in the subsequent decade, using various techniques to deal with endogeneity. We employ two main approaches: a dynamic two-way fixed-effects model, analogous to a standard difference-in-differences estimation; and a propensity score-based specification which explicitly models selection bias. We find a highly significant persistent effect on the GDP level: a one-off expansion in our autonomous demand variable by (an average of) 5% is associated 10 years later with a GDP level around 3% higher than in the control group, with no sign of mean reversion. We also document strong persistent effects on capital stock, employment and participation rates. Effects on productivity and the unemployment rate are also strong and quite persistent, but evidence regarding their permanence is more mixed. We do not find that expansions, on average, cause high or accelerating inflation. Our results lead us to ask whether hysteresis should be considered a distortion in the working of market economies that holds only in specific circumstances – as the mainstream literature has generally suggested – or whether it is, in fact, a pervasive phenomenon which holds most of the time.

On the Impact of Structural Reforms on Output and Employment; Evidence from a Cross-country Firm-level Analysis

Abstract: This paper analyzes the effects of selected structural reforms on output and employment in the short and medium term. It uses a comprehensive cross-country firm-level dataset covering both advanced and emerging market economies over the period 2003-2014. In line with previous studies, it finds that structural reforms have in general a positive impact on output and employment in the medium term. Furthermore, the paper also assesses whether the impact of structural reforms varies with firm-specific characteristics, such as size, leverage, profitability, and sector. We find evidence that firm characteristics do influence the effectiveness of structural reforms. These findings have relevant policy implications as they help policymakers tailor the design of structural reforms to maximize their payoffs, taking into account their heterogeneous impact on firms.

Sacrifice Ratio and Cost of Inflation for the Indian Economy

Abstract: Traditional concept of the Sacrifice Ratio measures the loss of potential output sustained by the society in the medium term to achieve reduction in the long-run inflation by 1% point. This concept is critically examined and generalized to include episodes increasing the long-run inflation rate to gain higher growth of output and employment and hence reduction in the poverty proportion in the medium term. Since the concept needs measurement through a shifting short-run equilibrium of dynamic aggregate demand and supply in terms of inflation rate and output attributable to monetary policy interventions, its estimation is challenging. There are two alternative approaches to estimate the ratio, the direct one and regression based. Both have their relative merits and demerits. The regression-based approach provides one unique average estimate of the Sacrifice Ratio for all episodes but allows holding other factors constant. The direct approach provides separate estimates by episodes but fails to hold other factors constant. The Sacrifice Ratio turns out to be in a narrow range of 1.8–2.1 for deliberate deflation and 2.8 for inflation in India. On the other hand, benefits of 1% point reduction in trend rate of inflation are at best 0.5% points increase in long-term growth of output that occurs after 4–5 years. This has implications on policy to disinflate.

Estimating and Projecting Potential Output Using CBO’s Forecasting Growth Model: Working Paper 2018-03

Abstract: As part of its responsibility for producing baseline projections of the economy and the federal budget, CBO regularly produces estimates and projections of potential output, a measure of the economy’s fundamental ability to supply goods and services. The projection of potential output serves as a key input to CBO’s macroeconomic forecasts and budget projections, helping the agency maintain consistency between its projections of labor supply and capital accumulation and its projections of taxes on income from labor and capital, of federal expenditures, and of the

Does human capital or physical capital constrain output in Japanese prefectures

Abstract: This paper develops a dynamic–network DEA (data envelopment analysis) model where total output is jointly produced from two sectors: a human capital sector and a physical capital sector. Each prefecture produces a final output and an intermediate product which is used to augment future physical capital. The optimization method allows future production possibilities to be enhanced if some final output in the current period is foregone so that larger amounts of the intermediate product can be produced. The goal is to choose the amounts of final output and intermediate product so as to maximize the size of the production possibility set. The method also allows identification of whether output is constrained by a lack of physical capital, a lack of human capital or a lack of both types of capital. We apply our method to 47 Japanese prefectures during the period 2007–2009. A key finding is that a lack of human capital is constraining potential output.

Economic cost of China’s oil import: Welfare estimation for 2001–2015

Abstract: This paper estimates the economic cost incurred by China’s foreign oil dependence during 2001–2015. By categorizing the cost into three different welfare components, namely wealth transfer, potential output loss, and disruption loss, our results show the annual welfare loss is between $7.58 billion to $168.24 billion (constant 2000 US dollars), or equivalent to between 0.57% and 3.93% of China's GDP. Wealth transfer is the dominant component, contributing 71% of the cost during the whole research period. As a result of international oil price fluctuation, disruption loss contributes 22% of the welfare loss. The other 6% is attributable to the decline of China’s potential output. Taking 2015 as the benchmark, sensitivity analyses show that international oil price change brings asymmetric impacts, i.e., a 10% rise of crude oil price rise will increase the cost by $4.08 billion while the same extent of price drop reduces the cost by $4.72 billion. Every barrel of additional domestic oil production reduces the welfare loss by $16.91, while the conservation of a barrel saves $20.50. Based on the results of this study, policy relevant insights are provided with respect to supply side and demand side.

Potential output in the post-crisis period

Abstract: Potential output is typically seen by economic analysts as the highest level of economic activity that can be sustained over the long term. Changes in potential output can be driven by factors such as labour supply, capital investment and technological innovation. Recent estimates by international institutions suggest that the euro area economy is currently operating close to its potential. The ongoing economic expansion appears to have largely absorbed the spare capacity created by the global financial crisis and the sovereign debt crisis. At the same time, the estimated rate of potential output growth also appears to have recovered most of its pre-crisis momentum, underpinned mainly by an expansion of the labour force, a decline in trend unemployment and stronger productivity gains. Looking ahead, projections by international institutions suggest that actual euro area GDP growth will continue to outpace potential growth in the near term. Hence, supply constraints are likely to become increasingly binding going forward, which would be conducive to a gradual strengthening of euro area inflation. JEL Classification: E22, E23, E32

A century of gaps

Abstract: This paper considers the role of financial information in the estimation and dynamics of the US output gap over more than a century. To this end, we extend the parsimonious approach of Borio, Disyatat, and Juselius (2016, 2014) to allow for time-varying effects of financial factors. This novel feature significantly improves real-time estimates of the output gap. It signals the peak and trough in economic activity related to both the Great Recession and the Great Depression. Two major insights follow. Credit dynamics are the primary drivers of the observed financial crisis, albeit with different conduits over the century: the stock market in 1929 and the housing market in 2008. Accounting for credit growth, the US potential growth has been stable at 2% since the beginning of 1980.

Measures of slack in the euro area

Abstract: This box aims to illustrate the difficulties in measuring slack in the euro area economy and the high uncertainty surrounding the estimates. A model-based estimate illustrates the point by suggesting an output gap that is close to zero, although surrounded by a high degree of uncertainty. Recent labour supply shocks are likely to be supporting the growth of both potential and actual output. The broad measure of labour underutilisation suggests that slack was larger during the financial crisis and over the recovery than indicated by the headline unemployment rate. JEL Classification: E22, E23, E32, J20, J64

Potential Growth : Outlook and Options for the Russian Federation

Abstract: This paper examines the past and future trajectory of the Russian Federation's potential growth: the speed at which an economy could grow if all resources were utilized efficiently. The findings show that it peaked before the 2008 global financial crisis and continued to decline up to 2017. The estimated potential growth rate was 3.8 percent in 2000-09 and 1.7 percent in 2010-17, a 2.1 percentage point decline. The most recent deceleration was due to a slowdown of productivity growth and a shrinking potential labor force, rather than a shortfall in capital accumulation. For its future trajectory, under the baseline scenario, Russia's potential growth is expected to continue its gradual downward trend, from 1.5 percent in 2017 to 1.3 percent in 2022. It is expected to recover gradually thereafter, primarily driven by stabilization of the labor force. The simulations of proposed reform measures currently being considered by policy makers, including a combination of pension reform, more migration, higher investment, and gradual acceleration of total factor productivity growth, can double Russia's potential growth rate to 3.0 percent by 2028. Under the assumptions discussed in the paper, pension reform, increases in migration, investment, and productivity contribute 0.4, 0.2, 0.6, and 0.3 percentage points, respectively, to the increase in Russia's potential growth rate. Potential growth is found to be most sensitive to changes in total factor productivity growth, suggesting that reforms that increase productivity may have the most impact on boosting Russia's potential growth.

Potential output and inflation dynamics after the Great Recession

Abstract: Ever since the end of the Great Recession, the US economy has experienced a period of mild inflation, which contradicts with the output–inflation relationship depicted by a traditional Phillips curve. This paper examines how the permanent output loss during the Great Recession has affected the ability of the Phillips curve to explain US inflation dynamics. We find great similarity among several established trend–cycle decomposition methods: potential output declined substantially after the Great Recession. Due to the fact that a lower level of potential output implies a lesser deflationary pressure, we then show that the Phillips curve does predict a period of mild inflation. This finding is largely consistent with the observed data.

Comparing Measures of Potential Output

Abstract: One of the goals of stabilization policy is to reduce the output gap?the difference between potential and actual output?during downturns. Potential output, however, is an unobserved variable whose definition can vary. For example, some view potential output as the level of output that can be produced when employment is at the natural rate. Others use trend measures of output to measure potential. We survey some of these measures using both full-sample data (all of the data that would be available through June 2017) and real-time data (the actual data that would have been available at different points in the sample). We construct six different measures of potential: a linear trend, a quadratic trend, the Congressional Budget Office measure, and three filtered trends. We compare these measures across methods and across time. We also use the measures to compute the monetary policy prescription in a standard interest rate rule and find very little difference across methods.

Estimates of Potential Output and the Neutral Rate for the U.S. Economy

Abstract: Estimates of potential output and the neutral short-term interest rate play important roles in policy making. However, such estimates are associated with significant uncertainty and subject to significant revisions. This paper extends the structural multivariate filter methodology by adding a monetary policy block, which allows estimating the neutral rate of interest for the U.S. economy. The addition of the monetary policy block further improves the reliability of the structural multivariate filter.

Potential Output in Canada: 2018 Reassessment

Abstract: This note summarizes the reassessment of potential output, conducted by the Bank of Canada for the April 2018 Monetary Policy Report. Overall, the profile for potential output growth is expected to remain flat at 1.8 per cent between 2018 and 2020 and 1.9 per cent in 2021.

Monetary policy with transitory vs. permanently low growth

Abstract: The recent economic slowdown in the euro area depends on supply-side and demand-side factors with different consequences on potential output. On the one hand, it may grow at a low pace for a long time; on the other hand, it may soon grow a bit faster. The ECB strategy has to adapt to these different possible outcomes. Anyway, we argue that the ECB has rooms for manoeuvre whatever the trend in output

Measuring the Natural Interest Rate for the Turkish Economy

Abstract: This paper measures the natural interest rate for the Turkish economy as an unobserved stochastic variable. In doing so, the study adopts a systems approach, based on a parsimonious New Keynesian model consisting of a Phillips curve, an IS curve, and a backward-looking Taylor-type interest rate rule linking the real interest rate to the natural interest rate. The model also includes stochastic laws of motion for the natural interest rate and potential output. As a contribution to the existing literature on natural interest rate and in view of the volatile nature of the Turkish economy, the parameters are assumed to be time varying. However, the requirement to simultaneously estimate parameters and to solve the statespace problem introduces non-linearity to the model. The issue of non-linearity can be handled by employing the extended Kalman filter (EKF), i.e., the use of standard Kalman filter equations to the first-order Taylor approximation of the non-linear model about the last estimate. Estimation results suggest that both the estimated natural interest rate and the real interest rate series move in tandem with the real interest rate. All the derived series are plausible and capture the significant turning points of the economy. As for the time-varying parameters, the estimated coefficients are reasonable. Overall, findings of this study provide guidance for future research on the natural interest rate, an important tool for monetary policy, and lay the basis for further work that may adopt the EKF algorithm. Most importantly, this study underlines the need to assess the stance of the monetary policy by using the natural interest rate.

Assessing Global Potential Output Growth: April 2018

Abstract: This note presents our estimates of potential output growth for the global economy through 2020. Overall, we expect global potential output growth to remain broadly stable over the projection horizon, averaging 3.3 per cent, although there is considerable uncertainty surrounding these estimates.

Long-Term Impact of the European Funds on Bulgaria's Economy

Abstract: The objective of this paper is to estimate the long-term effects of the funds of the European Union (EU) on the economy of Bulgaria. The influence of EU funding on capital stock, total factor productivity (TFP) and potential output has been assessed through a methodology based on a two-factor Cobb-Douglas production function. The impact of EU funds on the rates of long-term unemployment and natural unemployment has been also estimated by an OLS regression of time series data. The research results imply that the absorbed EU financing has a positive influence on potential output and TFP and a negative influence on potential employment and long-term unemployment rate.

An Alternative Estimate of Canadian Potential Output: The Multivariate State-Space Framework

Abstract: In this paper, we extend the state-space methodology proposed by Blagrave et al. (2015) and decompose Canadian potential output into trend labour productivity and trend labour input. As in Blagrave et al. (2015), we include output growth and inflation expectations from consensus forecasts to help refine our estimates.

Optimism, Pessimism, and Short-Term Fluctuations

Abstract: Economic theory offers several explanations as to why shifting expectations about future economic activity affect current demand. Abstracting from whether changes in expectations originate from swings in beliefs or fundamentals, we test empirically whether more optimistic or pessimistic potential output forecasts trigger short-term fluctuations in private consumption and investment. Relying on a dataset of actual data and forecasts for 89 countries over the 1990-2022 period, we find that private economic agents learn from different sources of in- formation about future potential output growth, and adjust their current demand accordingly over the two years following the shock in expectations. To provide a theoretical foundation to the empirical analysis, we also propose a simple Keynesian model that highlights the role of expectations about long-term output in determining short-term economic activity.

Persistent Effects of Autonomous Demand Expansions

Abstract: The prevailing wisdom that aggregate demand shocks determine short-run cyclical fluctuations around a supply-determined equilibrium growth rate and an associated equilibrium unemployment rate (or NAIRU) has been called into question by various strands of literature over the last few decades. Specifically, a recently revived literature on hysteresis finds significant persistence in the effects of negative aggregate demand shocks (e.g. Blanchard et al. 2015; Fatas and Summers 2016; Martin et al. 2015). This paper aims to assess this tendency to return to a supply-determined potential output, independent of aggregate demand, after episodes of demand expansion. In line with the hysteresis literature, we assess the persistence of aggregate demand effects on key macroeconomic outcomes. However, in contrast with much of that literature, we assess whether persistence is detected also in instances of demand expansion. We study 94 episodes of demand expansion in 34 OECD countries between 1960 and 2015. We look at the sum of primary public expenditure and exports, a variable we call `autonomous demand`. We define an expansion as a large yearly percentage increase in autonomous demand, `large` meaning greater than a standard deviation above the country mean. We analyze the impact of these expansions on key macroeconomic outcomes in the subsequent decade, using various techniques to deal with endogeneity. We employ two main approaches: a dynamic two-way fixed-effects model, analogous to a standard difference-in-differences estimation; and a propensity score-based specification which explicitly models selection bias. We find a highly significant persistent effect on the GDP level: a one-off expansion in our autonomous demand variable by (an average of) 5% is associated 10 years later with a GDP level around 3% higher than in the control group, with no sign of mean reversion. We also document strong persistent effects on capital stock, employment and participation rates. Effects on productivity and the unemployment rate are also strong and quite persistent, but evidence regarding their permanence is more mixed. We do not find that expansions, on average, cause high or accelerating inflation. Our results lead us to ask whether hysteresis should be considered a distortion in the working of market economies that holds only in specific circumstances A¢â‚¬â€œ as the mainstream literature has generally suggested A¢â‚¬â€œ or whether it is, in fact, a pervasive phenomenon which holds most of the time.

Re-measuring the natural interest rate for the Turkish economy: Does using the new GDP series matter?

Abstract: The Turkish Statistical Institute announced a new GDP series in Turkey at end-2016, which produced a remarkable upward revision in real GDP growth during the 2009-2015 period. The divergence between the old and the new series also pointed to a higher potential output, bringing the possibility that the deviation of output from its potential, i.e. the output gap has changed in the meantime. This necessitated the re-estimation of some indicators, the measurement of which is based on GDP, potential output and the output gap. Natural interest rate is one such important indicator that is used to assess the monetary policy stance, yet it is unobservable. Hence, this paper measures the natural interest rate for the Turkish economy using the new GDP series by applying extended Kalman filter to an unobserved components model in a state-space form. In order to determine how natural interest rate is affected by the GDP revision, natural interest rate is also estimated by using the old GDP series. The estimation results of the state-space model show that the revision in GDP series is reflected on the natural interest rate. Accordingly, a difference has been observed in the natural interest rate estimate as of 2009, and this difference is even more apparent in 2015. The results also imply that the recent monetary policy conduct is consistent with the economic fundamentals. In the meantime, other estimated series are plausible and capture the significant turning points of the economy, while the time-varying parameters are also reasonable. In sum, findings confirm the significance of using natural interest rate as a benchmark in the conduct of monetary policy. Yet, the imprecision of the natural interest rate estimate due to its unobservable nature implies that despite being an important gauge for the monetary policy stance, major policy decisions should still not be based solely on the natural interest rate.