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Estimating potential output and output gaps for the South African economy

Author

Listed:
  • Ben Smit

    (Department of Economics and Bureau of Economic Research, Stellenbosch University)

  • Le Roux Burrows

    (Department of Economics, Stellenbosch University)

Abstract

An economy's level of potential output plays a central (and critical) role in the formulation of monetary policy focused on maintaining low and stable inflation. Assuming that potential output is determined mainly by the quantity and quality of its productive factors and the level of technology, it follows that potential output is related to the capacity of the economy to supply goods and services. Thus the growth rate of potential output is the rate of growth that the economy can sustain for long periods of time. If the economy grows at a different rate from the potential output, then inflation will tend to adjust in response to demand pressures. In modern macroeconomic theory, one of the key sources of inflationary pressure is the difference between aggregate demand and potential output which can be quantified as the percentage difference between actual output and potential output (or the output gap). If the output gap is positive inflation tends to rise and vice versa if the gap is negative. The problem, however, is that potential output cannot be directly observed. A variety of techniques are currently used in other countries to estimate potential output, including the use of the Hodrick-Prescott filter. In this paper the various available techniques will be surveyed and applied to South African data in order to generate an economy-wide measure of potential output and the output gap.

Suggested Citation

  • Ben Smit & Le Roux Burrows, 2002. "Estimating potential output and output gaps for the South African economy," Working Papers 05/2002, Stellenbosch University, Department of Economics.
  • Handle: RePEc:sza:wpaper:wpapers5
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    References listed on IDEAS

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    Cited by:

    1. Stan du Plessis & Ben Smit & Federico Sturzenegger, 2007. "Identifying aggregate supply and demand shocks in South Africa," Working Papers 11/2007, Stellenbosch University, Department of Economics.
    2. Charlotte DU Toit & Elna Moolman, 2003. "Estimating Potential Output And Capacity Utilisation For The South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 71(1), pages 96-118, March.
    3. Johannes W. Fedderke & Daniel K. Mengisteab, 2017. "Estimating South Africa's Output Gap and Potential Growth Rate," South African Journal of Economics, Economic Society of South Africa, vol. 85(2), pages 161-177, June.
    4. Stan du Plessis & Ben Smit & Federico Sturzenegger, 2008. "Identifying Aggregate Supply and Demand Shocks in South Africa †," Journal of African Economies, Centre for the Study of African Economies, vol. 17(5), pages 765-793, November.
    5. Rulof P. Burger & Francis J. Teal, 2015. "The Effect of Schooling on Worker Productivity: Evidence from a South African Industry Panel," Journal of African Economies, Centre for the Study of African Economies, vol. 24(5), pages 629-644.
    6. Byron Botha & Franz Ruch & Rudi Steinbach, 2018. "Shortlived supply shocks to potential growth," Working Papers 8605, South African Reserve Bank.
    7. Cobus Vermeulen, 2023. "The inherent uncertainties in output gap estimation a South African perspective," Working Papers 11051, South African Reserve Bank.
    8. Johannes Hermanus Kemp, 2015. "Measuring Potential Output for the South African Economy: Embedding Information About the Financial Cycle," South African Journal of Economics, Economic Society of South Africa, vol. 83(4), pages 549-568, December.
    9. Guangling (dave Liu & Rangan Gupta, 2007. "A Small‐Scale Dsge Model For Forecasting The South African Economy," South African Journal of Economics, Economic Society of South Africa, vol. 75(2), pages 179-193, June.
    10. Johannes W. Fedderke, 2022. "Identifying steady‐state growth and inflation in the South African economy, 1960–2020," South African Journal of Economics, Economic Society of South Africa, vol. 90(3), pages 279-300, September.
    11. P. Burger & M. Marinkov, 2006. "The South African Phillips Curve: How Applicable Is The Gordon Model?," South African Journal of Economics, Economic Society of South Africa, vol. 74(2), pages 172-189, June.
    12. Marina Marinkov & Jean‐pierre Geldenhuys, 2007. "Cyclical Unemployment And Cyclical Output: An Estimation Of Okun'S Coefficient For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 373-390, September.
    13. Jean-Pierre Geldenhuys & Marina Marinkov, 2007. "Robust Estimates of Okun’s Coefficient for South Africa:," Working Papers 055, Economic Research Southern Africa.

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    More about this item

    Keywords

    Potential output; inflation; output gaps; South Africa;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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