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Methodology for Estimating Output Gap and Potential Growth Rate: An Update

Author

Listed:
  • Takuji Kawamoto

    (Bank of Japan)

  • Tatsuya Ozaki

    (Bank of Japan)

  • Naoya Kato

    (Bank of Japan)

  • Kohei Maehashi

    (Bank of Japan)

Abstract

This paper explains the new methodology for calculating Japan's output gap and potential growth rate, both of which are regularly estimated and released by the Research and Statistics Department of the Bank of Japan. We have revised the estimation method given: (1) the retroactive revision of Japan's GDP statistics; (2) the newly available capital stock data which is in line with the new 2008SNA guidelines and adjusted for economic depreciation; and (3) recent structural changes in the factor markets for labor and capital that should be reflected in these estimated trends. Specifically, we have changed our estimation methodology in the following three ways: first, we have revised the estimation method of the "labor force participation rate gap," so as to reflect the recent sustained increase in the labor force participation rate starting around 2012 as a structural trend; second, we have revised the estimation method of the "hours worked gap," to identify the persistent decline in working hours over recent years as more of a structural development possibly due to changes in people's working styles; and third, we have revised the method for calculating the manufacturing "utilization gap," in order to reflect the economic depreciation of equipment and structures more appropriately. Taking a look at the revised output gap, we find that the overall picture for most of the recent period remains unchanged. Furthermore, it turns out that the inflation-prediction power of the revised output gap is almost unchanged from the previous version. Meanwhile, the resulting potential growth rate shows a significant upward revision for the last few years, mainly reflecting a rise in the TFP growth rate associated with the revision of the GDP statistics. As a result, the potential growth rate in recent years is estimated to be in the range of 0.5-1.0 percent, which is comparable to that of the first half of the 2000s, prior to the global financial crisis.

Suggested Citation

  • Takuji Kawamoto & Tatsuya Ozaki & Naoya Kato & Kohei Maehashi, 2017. "Methodology for Estimating Output Gap and Potential Growth Rate: An Update," Bank of Japan Research Papers 17-05-31, Bank of Japan.
  • Handle: RePEc:boj:bojron:ron170531a
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    File URL: http://www.boj.or.jp/en/research/brp/ron_2017/data/ron170531a.pdf
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    References listed on IDEAS

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    1. Karel Havik & Kieran Mc Morrow & Fabrice Orlandi & Christophe Planas & Rafal Raciborski & Werner Roeger & Alessandro Rossi & Anna Thum-Thysen & Valerie Vandermeulen, 2014. "The Production Function Methodology for Calculating Potential Growth Rates & Output Gaps," European Economy - Economic Papers 2008 - 2015 535, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Naoko Hara & Naohisa Hirakata & Yusuke Inomata & Satoshi Ito & Takuji Kawamoto & Takushi Kurozumi & Makoto Minegishi & Izumi Takagawa, 2006. "The New Estimates of Output Gap and Potential Growth Rate," Bank of Japan Review Series 06-E-3, Bank of Japan.
    3. Charles Gilbert & Norman J. Morin & Richard D. Raddock, 2000. "Industrial production and capacity utilization: recent developments and the 1999 annual revision," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Mar, pages 20-33.
    4. Paula De Masi, 1997. "IMF Estimates of Potential Output; Theory and Practice," IMF Working Papers 97/177, International Monetary Fund.
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    Citations

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    Cited by:

    1. Sohei Kaihatsu & Maiko Koga & Tomoya Sakata & Naoko Hara, 2018. "Interaction between Business Cycles and Economic Growth," Bank of Japan Working Paper Series 18-E-12, Bank of Japan.
    2. Yoshihiko Hogen & Ryoichi Okuma, 2018. "The Anchoring of Inflation Expectations in Japan: A Learning-Approach Perspective," Bank of Japan Working Paper Series 18-E-8, Bank of Japan.
    3. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.

    More about this item

    Keywords

    output gap; potential growth rate; GDP; phillips curve;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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