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Estimating potential output and output gaps for the South African economy

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  • 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.

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File URL: http://www.ekon.sun.ac.za/wpapers/2002/wp052002/wp-05-2002.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 05/2002.

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Date of creation: 2002
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Handle: RePEc:sza:wpaper:wpapers5

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Related research

Keywords: Potential output; inflation; output gaps; South Africa;

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References

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  1. King, R.G. & Rebelo, S.T., 1989. "Low Frequency Filtering And Real Business Cycles," RCER Working Papers 205, University of Rochester - Center for Economic Research (RCER).
  2. Guay, A & St-Amant, P, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Technical Reports 78, Bank of Canada.
  3. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  4. Cote, D. & Hostland, D., 1996. "An Econometric Examination of the Trend Unemployment Rate in Canada," Working Papers 96-7, Bank of Canada.
  5. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  6. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
  8. Evans, George & Reichlin, Lucrezia, 1994. "Information, forecasts, and measurement of the business cycle," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 233-254, April.
  9. Alain DeSerres, & Alain Guay & Pierre St-Amant, . "Estimating and Projecting Potential Output Using Structural VAR Methodology: The Case of the Mexican Economy," Working Papers 95-2, Bank of Canada.
  10. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
  11. Chantal Dupasquier & Alain Guay & Pierre St-Amant, 1997. "A Comparison of Alternative Methodologies for Estimating Potential Output and the Output Gap," Working Papers 97-5, Bank of Canada.
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Citations

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Cited by:
  1. Harri Kemp, 2014. "Measuring potential output for the South African economy: Embedding information about the financial cycle," Working Papers 03/2014, Stellenbosch University, Department of Economics.
  2. Rulof P. Burger & Francis J. Teal, 2014. "The effect of schooling on worker productivity: Evidence from a South African industry panel," Working Papers 04/2014, Stellenbosch University, Department of Economics.
  3. 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 (CSAE), vol. 17(5), pages 765-793, November.

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