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Structural Breaks in Potential GDP Of Three Major Economies: Just Impaired Credit or the “New Normal”?

Author

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  • Alexander Yu. Apokin

    () (National Research University Higher School of Economics)

  • Irina B. Ipatova

    () (National Research University Higher School of Economics)

Abstract

This paper investigates the factors behind the recent growth slowdown (so-called Secular Stagnation) in the US, the euro area and Japan using the metrics of potential output growth. Specifically, our results offer limited support for an impaired credit transmission channel hypothesis (Reinhart and Rogoff, 2009a), while not supporting a supply slowdown hypothesis (Gordon, 2012). We propose a unified framework to test those hypotheses based on structural break tests of potential output. We estimate a variety of potential output growth models accounting for inflation, unemployment, and private credit dynamics (finance-neutral estimates) with multivariate Kalman filters and subject our estimates to structural break tests. We detect structural breaks between 2008 and 2010 for all three countries with Bai-Perron search procedure, the result being robust to the model specification and sample choice, with no significant difference between ordinary and finance-neutral estimates. We proceed with the Chen-Liu test to detect negative temporary change outliers in the Great Recession for the US and the euro area and negative level shift outliers for Japan. Moreover, original breaks in the Chen-Liu test disappear in the US and the euro area once we account for private credit and labour market dynamics, but do not change for Japan.

Suggested Citation

  • Alexander Yu. Apokin & Irina B. Ipatova, 2016. "Structural Breaks in Potential GDP Of Three Major Economies: Just Impaired Credit or the “New Normal”?," HSE Working papers WP BRP 142/EC/2016, National Research University Higher School of Economics.
  • Handle: RePEc:hig:wpaper:142/ec/2016
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    File URL: https://www.hse.ru/data/2016/07/01/1115759497/142EC2016.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    New Normal; Secular Stagnation; Great Slump; potential GDP; Kalman filter; Bai-Perron test; Chen-Liu test;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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