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Estimating Potential Output : a Survey of the Alternative Methods and their Applications to Brazil

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  • Nelson H. Barbosa Filho

Abstract

This paper presents the main issues involved in estimating potential output. Theobjective is to describe the alternative methods and analyze their application andimplications for growth forecasts and macroeconomic policy in Brazil. The textemphasizes the determinants of potential output under fixed and flexible coefficientsof production. Given the wide use of aggregate measures of Total Factor Productivityin growth accounting, and the sensitivity of such a variable to economic assumptionsand errors of measurement, the text also presents the main applied critiques andalternatives to aggregate growth-accounting exercises. The main conclusions are: i)the annual potential growth rate of Brazil?s Gross Domestic Product (GDP) variessubstantially depending on the method and hypotheses adopted and, what is mostimportant, potential GDP is not separable from effective GDP in the long-run; ii)growth-accounting and time-series studies of Brazil result in low potential-outputgrowth rates because they extrapolate the slow growth of 1981-2003 to the future;iii) capital seems to be the main constraint on growth in Brazil and, therefore, ademand-led increase in investment can raise both its effective and potential outputlevels; iv) however, because of the slow adjustment of the capital stock, an investmentboom can also hit a supply constraint before the stock of capital has time to adjust tothe growth rate of investment; and v) aggregate measures of potential output do notcarry much information about the economy and, therefore, they should becomplemented by sectoral estimates of capacity utilization to identify the bottlenecksin inter-industry flows and the corresponding demand pressures on inflation.

Suggested Citation

  • Nelson H. Barbosa Filho, 2005. "Estimating Potential Output : a Survey of the Alternative Methods and their Applications to Brazil," Discussion Papers 1092, Instituto de Pesquisa Econômica Aplicada - IPEA.
  • Handle: RePEc:ipe:ipetds:1092
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    Cited by:

    1. Mahmood-ul-Hasan Khan, 2008. "Short Run Effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 4, pages 1-30.
    2. José Ronaldo de Castro Souza Júnior, 2005. "Produto Potencial: Conceitos, Métodos de Estimação e Aplicação à Economia Brasileira," Discussion Papers 1130, Instituto de Pesquisa Econômica Aplicada - IPEA.
    3. Edson Paulo Domingues & Marco Flavio da Cunha Resende & Aline Souza Magalhães & Admir Antonio Betarelli Junior, 2010. "Cenário Macroeconômico Para A Economia Brasileira 2010-2025: Repercussões No Estado De Minas Gerais E Seus Municípios," Anais do XIV Seminário sobre a Economia Mineira [Proceedings of the 14th Seminar on the Economy of Minas Gerais],in: Anais do XIV Seminário sobre a Economia Mineira [Proceedings of the 14th Seminar on the Economy of Minas Gerais] Cedeplar, Universidade Federal de Minas Gerais.
    4. S. Adnan H. A. S. Bukhari & Safdar Ullah Khan, 2008. "Estimating Output Gap for Pakistan Economy: Structural and Statistical Approaches," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 4, pages 31-60.
    5. Franklin Serrano & Ricardo Summa, 2011. "Macroeconomic Policy, Growth and Income Distribution in the Brazilian Economy in the 2000s," CEPR Reports and Issue Briefs 2011-13, Center for Economic and Policy Research (CEPR).

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