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Potential output in Latin America: a standard approach for the 1950-2002 period

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  • Hofman, André A.
  • Tapia, Heriberto

Abstract

(*) This document was prepared by André A. Hofman of the Economic Projections Center of the Statistics Division, and Heriberto Tapia research assistant in the office of the Executive Secretary of ECLAC. The views expressed in this document, which has been reproduced without formal editing, are those of the authors and do not necessarily reflect the views of the Organization.. Abstract Potential output estimates are becoming increasingly important in policy design in Latin America (ECLAC, 2002) and the objective of this paper is to make a methodological contribution to this field of work. For a proper evaluation of the macroeconomic situation in a certain point in time it is important to have an idea of the level of potential output. For monetary policy decisions it is important to know what the level of potential output is compared to the effective output. In an era in which inflation targeting has become widespread in Latin America it has become increasingly important to estimate potential output. In projections of economic growth the output gap can be a very important input. Estimates of potential output are of course only one of many indicators to be used in macroeconomic policy evaluation. In most developed countries an array of measures about the economic cycle are used among which the most important are measures of capacity use, delivery lags and the NAIRU (non-accelerating inflationary rate of unemployment) and direct measures of inflation. In the evaluation of the macroeconomic situation additional elements that might affect the economy (terms of trade, external situation) must be taken into consideration the whole complex environment of the economy internal and external. The work on economic growth has experienced a rapid expansion in the last few decades. Interesting new ideas have been developed and older somewhat forgotten ones have come to the focus of attention again. The growth performance of nations shows a great variety in results and these differences can be explained, among other causes, by differences in accumulation of production factors and multi factor productivity on one level and institutional factors and the international context on an other. In the context of these new approaches in the analysis of economic growth concepts like catching-up and potential growth are becoming increasingly important. In estimating potential output two approaches can be distinguished. In the first one a variety of statistical detrending techniques are applied, in our case using the Hodrick-Prescott filter, and in the second approach the output gap is estimated on the basis of structural relationships. The Hodrick-Prescott filter defines a "trend" output. The second part on production functions indicate more towards a concept of production frontier or the maximum possible production given certain factors. The paper estimates potential output in a group of nine countries in Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Venezuela. These countries cover around 80% of the Latin American territory and about 90% of its GDP. A new aspect of our estimates is that they introduce the concept of structural change in the production function. Contents: - Methodology -- Estimating trends -- Estimating production functions - Results - Conclusions - References - Annexes: Country cases""

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  • Hofman, André A. & Tapia, Heriberto, 2003. "Potential output in Latin America: a standard approach for the 1950-2002 period," Estudios Estadísticos 4721, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  • Handle: RePEc:ecr:col027:4721
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    References listed on IDEAS

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    1. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    2. Regina Kaiser & Agustín Maravall, 1999. "Estimation of the business cycle: A modified Hodrick-Prescott filter," Spanish Economic Review, Springer;Spanish Economic Association, vol. 1(2), pages 175-206.
    3. Ffrench-Davis, Ricardo, 2003. "Entre el neoliberalismo y el crecimiento con equidad: tres décadas de política económica en Chile," Copublicaciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 1782 edited by Cepal.
    4. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    5. Osvaldo Meloni, 2005. "Crecimiento potencial y productividad en la Argentina: 1980-1997," Development and Comp Systems 0503001, University Library of Munich, Germany.
    6. André A. Hofman, 2000. "The Economic Development of Latin America in the Twentieth Century," Books, Edward Elgar Publishing, number 1534, December.
    7. Ms. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 1997/177, International Monetary Fund.
    8. Hofman, André A., 2001. "Long run economic development in Latin America in a comparative perspective: proximate and ultimate causes," Macroeconomía del Desarrollo 5460, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    9. Ms. Sweta Chaman Saxena & Ms. Valerie Cerra, 2000. "Alternative Methods of Estimating Potential Output and the Output Gap: An Application to Sweden," IMF Working Papers 2000/059, International Monetary Fund.
    10. Escaith, Hubert, 2003. "Tendencias y extrapolación del crecimiento en América Latina y el Caribe," Estudios Estadísticos 4724, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    1. Sergio G. Villarroel-Böhrt, 2007. "Reallocation of Resources within the National Productive System in Bolivia: A View from the Perspective of Tradable and Non-Tradable Goods," Economía Mexicana NUEVA ÉPOCA, , vol. 0(1), pages 105-149, January-J.
    2. Sergey Sinelnikov-Murylev & Sergey Drobyshevsky & Maria Kazakova & Michael Alexeev, 2016. "Decomposition of Russia's GDP Growth Rates," Research Paper Series, Gaidar Institute for Economic Policy, issue 167P, pages 123-123.
    3. Escaith, Hubert, 2005. "Alternative measures of potential economic growth in Latin America," Documentos de Proyectos 3555, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    4. Cervera-Ferri, José Luis & Escaith, Hubert, 2007. "The millennium development goals: strategic implications for the Latin American and Caribbean statistical systems," Estudios Estadísticos 4749, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Escaith, Hubert, 2006. "Can Latin America fly?: revising the engines of growth," Estudios Estadísticos 4747, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    6. Ricardo Ffrench-Davis, 2008. "From Financieristic To Real Macroeconomics: Seeking Development Convergence In Ees," Working Papers wp272, University of Chile, Department of Economics.

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