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Growth beyond imbalances. Sustainable growth rates and output gap reassessment

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  • Enrique Alberola

    (Banco de España)

  • Ángel Estrada

    ()
    (Banco de España)

  • Daniel Santabárbara

    (Banco de España)

Abstract

‘The Great Recession’ was preceded by a prolonged period of high growth accompanied by low and stable inflation, the so called ‘Great Moderation’. During that period, potential growth estimates were trending upwards and output gaps remained small. However, other imbalances were progressively accumulating, eventually bringing about the worst crisis in decades. Standard potential growth estimates, which consider inflation as the only indicator of macroeconomic imbalances, along with the stability of inflation in that period, therefore provided misleading signals to policymakers. This paper introduces a methodology to obtain sustainable growth rates, as an alternative measure to potential growth. Sustainable growth is defined as the output growth that does not generate or widen macroeconomic imbalances, identified through a wide set of domestic and external indicators. This allow us to reassess the behavior of output gaps in the US, the UK, Spain, Germany and China both in ‘the Great Moderation’ period and during ‘the Great Recession’. In countries with large imbalances, sustainable growth rates are more stable than potential growth resulting in output gaps that were substantially larger in the period prior to the crisis.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/13/Fich/dt1313e.pdf
File Function: First version, October 2013
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1313.

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Length: 36 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:bde:wpaper:1313

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Keywords: sustainable growth; macroeconomic imbalances; output gaps; potential growth;

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  1. Claudio Borio & Frank Piti Disyatat & Mikael Juselius, 2013. "Rethinking potential output: Embedding information about the financial cycle," BIS Working Papers 404, Bank for International Settlements.
  2. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, Elsevier, vol. 40(1), pages 15-32, January.
  3. Francesca D'Auria & Cécile Denis & Karel Havik & Kieran Mc Morrow & Christophe Planas & Rafal Raciborski & Werner Roger & Alessandro Rossi, 2010. "The production function methodology for calculating potential growth rates and output gaps," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 420, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  5. Niek Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(11), pages 1339-1344.
  6. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
  7. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
  8. Claudio Borio & Piti Disyatat, 2011. "Global imbalances and the financial crisis: Link or no link?," BIS Working Papers 346, Bank for International Settlements.
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Cited by:
  1. Krupkina, Anna & Deryugina, Elena & Ponomarenko, Alexey, 2014. "Estimating sustainable output growth in emerging market economies," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 11/2014, Bank of Finland, Institute for Economies in Transition.

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