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Output Gap In Transition Economies Using Unobserved Component Method: The Case Of Czech Republic, Estonia And Kosovo

Author

Listed:
  • Albulene Kastrati

    (AAB College, Republic of Kosovo)

  • Geoff Pugh

    (Staffordshire University, United Kingdom)

  • Valentin Toci

    (University of Prishtina, Republic of Kosovo)

Abstract

This paper investigates the concept and estimation of the output gap in transition economies, with special reference to the Czech Republic, Estonia and Kosovo. The motivation for investigating this phenomenon lies in the macroeconomic imbalances characterizing many transition economies, such as relatively sluggish growth, chronic balance of payments deficits and structural deficiencies, while continuously operating in the presence of relatively large underutilized resources. Given that the potential output and the corresponding output gap concepts are mainly discussed in the light of mainstream theories, the novelty of this paper stands in examining the relevance of the output gap in transition context. In order to reflect persistent underutilised resources as well as several structural breaks, the Unobserved Components model operationalized via the Kalman filter was employed as a the appropriate estimation method for transition economies. Another novelty of this study is the textual explanation of the technicalities underpinning the Kalman filtering procedure. While causing the output to fall below its potential, the results suggest that the Global Financial Crisis (GFC) had a significant but transitory impact in the Czech Republic and Estonia cases. Due to relatively low external exposure and domestically funded banking system, the GFC caused no recession in Kosovo, but rather slowed the pace of growth mainly via the external sector channels and the uncertainties perceived by the banking sector. Last, the negative relationship between inflation and output gap was informative in the case of the Czech Republic and Estonia because it suggested a presence of inflation inertia in these countries, whereas the impact of the output gap on the inflation rate in Kosovo proved insignificant.

Suggested Citation

  • Albulene Kastrati & Geoff Pugh & Valentin Toci, 2017. "Output Gap In Transition Economies Using Unobserved Component Method: The Case Of Czech Republic, Estonia And Kosovo," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 26(2), pages 477-500, december.
    • Handle: RePEc:avo:emipdu:v:26:y:2017:i:2:p:477-500
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    References listed on IDEAS

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    More about this item

    Keywords

    Output Gap; Unobserved Components Model; Kalman Filter; Transition Economies;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies

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