Potential Output and the Output Gap in Ireland
The performance of the Irish economy in recent years has been outstanding. Between 1994 and 2000, Ireland’s economic growth, as measured by the annual percentage change in real GDP (Gross Domestic Product), has expanded at an annual average rate of approximately 9 per cent. Over the same time period, we have also experienced annual employment growth of approximately 5 per cent and capital growth of around 4 per cent. Recent developments would suggest that such advances cannot continue forever. The capacity of an economy depends on the quantities of labour, capital and technology. Over time that capacity will grow because of the movement of employment from low output industries to high output modern sectors and advances in productivity brought about by improvements in technology. An economy may for brief periods operate above capacity. This is unlikely to persist in the long-run, as there will tend to be a wage and price adjustment process which will restore equilibrium. The capacity of an economy is not measured directly and must be estimated using information from other economic aggregates, which can be measured. Several methods have been proposed but there is no general agreement as to which method is best. This paper applies several of these methods to estimate the capacity of the Irish economy over the period 1960 to 2000. A broad degree of agreement was found between the various methods. Since 1997 the economy has operated above capacity. Forecasts of the capacity growth rate were outlined using estimates from ESRI (1999) and internal Central Bank estimates. This suggests that economy will be operating below capacity by 2004, when a more sustainable level of output is achieved. The output gap is defined as the difference between actual and capacity output. A positive gap (output greater than capacity) is associated with excess demand in the economy, which is a likely cause of inflation. In an open economy, such as Ireland, it is often argued that the main determinants of inflation are foreign prices and the exchange rate. The measures of the output gap derived in this paper indicate that they have some influence on overall inflation in Ireland, but the results were relatively weak. The relationship between “domestically generated” inflation and the output gap measures indicated a much stronger correlation.
|Date of creation:||Sep 2001|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box No. 559, Dame Street, Dublin 2|
Phone: (01) 671 6666
Fax: (01) 671 6561
Web page: http://www.centralbank.ie
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fabiani, Silvia & Mestre, Ricardo, 2000. "Alternative measures of the NAIRU in the euro area: estimates and assessment," Working Paper Series 0017, European Central Bank.
- Aidan Meyler, 1998. "Technology and Foreign Direct Investment in Ireland," Economics Technical Papers 9810, Trinity College Dublin, Department of Economics.
- Adams, Charles & Coe, David T., 1989.
"A Systems Approach to Estimating the Natural Rate of Unemployment and Potential Output for the United States,"
8622, University Library of Munich, Germany.
- Charles Adams & David T. Coe, 1990. "A Systems Approach to Estimating the Natural Rate of Unemployment and Potential Output for the United States," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 232-293, June.
- Paula De Masi, 1997. "IMF Estimates of Potential Output; Theory and Practice," IMF Working Papers 97/177, International Monetary Fund.
- Kenny, Geoff, 1996. "Capacity Utilisation in Irish Manufacturing," Research Technical Papers 2/RT/96, Central Bank of Ireland.
- Abdelhak Senhadji, 2000. "Sources of Economic Growth: An Extensive Growth Accounting Exercise," IMF Staff Papers, Palgrave Macmillan, vol. 47(1), pages 6.
- Z, Griliches & Jacques Mairesse, 1997.
"Production Functions : The Search for Identification,"
97-30, Centre de Recherche en Economie et Statistique.
- Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
- Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," Harvard Institute of Economic Research Working Papers 1719, Harvard - Institute of Economic Research.
- John FitzGerald & Ide Kearney, 2000. "Convergence in Living Standards in Ireland: The Role of the New Economy," Papers WP134, Economic and Social Research Institute (ESRI).
- Miguel Lebre de Freitas, 2000. "Quantity versus quality: the growth accounting in Ireland," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
- Jordi Gali & Mark Gertler, 2000.
"Inflation Dynamics: A Structural Econometric Analysis,"
NBER Working Papers
7551, National Bureau of Economic Research, Inc.
- Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
- Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Ben S. Bernanke & Refet S. Gurkaynak, 2001.
"Is Growth Exogenous? Taking Mankiw, Romer and Weil Seriously,"
NBER Working Papers
8365, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Refet S. Gürkaynak, 2002. "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 11-72 National Bureau of Economic Research, Inc.
- W. Bolt & P.J.A. van Els, 2000.
"Output Gap and Inflation in the EU,"
DNB Staff Reports (discontinued)
44, Netherlands Central Bank.
- Uhlig, H.F.H.V.S. & Ravn, M., 1997.
"On Adjusting the H-P Filter for the Frequency of Observations,"
1997-50, Tilburg University, Center for Economic Research.
- Morten O. Ravn & Harald Uhlig, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CESifo Working Paper Series 479, CESifo Group Munich.
- Ravn, Morten O & Uhlig, Harald, 2001. "On Adjusting the HP-Filter for the Frequency of Observations," CEPR Discussion Papers 2858, C.E.P.R. Discussion Papers.
- Raymond Torres & John P. Martin, 1989. "Potential Output in the Seven Major OECD Countries," OECD Economics Department Working Papers 66, OECD Publishing.
- John FitzGerald, 2001.
"Wage Determination in Economies in Transition: Ireland Spain and Portugal,"
WP141, Economic and Social Research Institute (ESRI).
- John FitzGerald & Jonathan Hore, 2002. "Wage Determination in Economies in Transition: Ireland, Spain and Portugal," Papers WP147, Economic and Social Research Institute (ESRI).
- Duffy, David & FitzGerald, John & Kearney, Ide & Smyth, Diarmaid, 1999. "Medium-Term Review 1999-2005, No. 7," Forecasting Report, Economic and Social Research Institute (ESRI), number MTR07, December.
- Meyler, Aidan, 1999.
"The Non-Accelerating Inflation Rate of Unemployment (NAIRU) in a Small Open Economy: The Irish Context,"
Research Technical Papers
5/RT/99, Central Bank of Ireland.
- Meyler, Aidan, 1999. "The non-accelerating inflation rate of unemployment (NAIRU) in a small open economy: The irish context," MPRA Paper 11363, University Library of Munich, Germany.
- Evans, George W., 1989. "A measure of the U.S. output gap," Economics Letters, Elsevier, vol. 29(4), pages 285-289.
- Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
- 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.
- Jacques R. Artus, 1977. "Measures of Potential Output in Manufacturing for Eight Industrial Countries, 1955-78 (Estimation du potentiel de production relative au secteur manufacturier de huit pays industriels, 1955-78) (Medic," IMF Staff Papers, Palgrave Macmillan, vol. 24(1), pages 1-35, March.
When requesting a correction, please mention this item's handle: RePEc:cbi:wpaper:5/rt/01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fiona Farrelly)
If references are entirely missing, you can add them using this form.