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Measuring Output Gap in Latvia

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  • Dainis Stikuts

    (Bank of Latvia)

Abstract

To determine whether economic progress of a country presents a threat to its macroeconomic sustainability, the difference between actual and potential output is usually used in the formulation of the economic policy. A number of methodologies, including the time series method, HP filter approach and CD function, have been used in the estimation of potential GDP. Potential production factor values were calculated for the needs of the production function. The data used in the paper lead to an inference that the economic growth depends on increases in capital stock and technological progress, both contributing to labour productivity and offsetting workforce shrinkages. Focusing on the relationship between output gap and inflation, this paper concludes that in Latvia, in contrast to several developed countries, the correlation between output gap and inflation is extremely weak due to the size and openness of the national economy as well as labour market inelasticity. Surveys conducted to date do not produce adequate data for an accurate estimation of the impact the output gap may have on inflation. Inflation is affected by a number of factors, e.g. Latvia's openness to imports, a relatively unlimited external supply of goods for relatively fixed prices, and administratively regulated prices, but it does not depend on the output gap. Hence the excessive demand is to be associated with a rise in imports rather than an upswing in inflation. Therefore, instead of inflation rate, it is the current account that reflects the domestic demand and its development trends more accurately.

Suggested Citation

  • Dainis Stikuts, 2003. "Measuring Output Gap in Latvia," Working Papers 2003/02, Latvijas Banka.
  • Handle: RePEc:ltv:wpaper:200302
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    References listed on IDEAS

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    3. Marit Hinnosaar, 2001. "Potential output estimates for Central and East European countries using production function method," Bank of Estonia Working Papers 2001-2, Bank of Estonia, revised 13 Oct 2001.
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    5. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
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    Citations

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    Cited by:

    1. Ludmila Fadejeva & Aleksejs Melihovs, 2010. "Measuring Total Factor Productivity and Variable Factor Utilization," Eastern European Economics, Taylor & Francis Journals, vol. 48(5), pages 63-101, September.
    2. Titarenko, Deniss, 2005. "The Influence of Foreign Direct Investment on Domestic Investment Processes in Latvia," MPRA Paper 18192, University Library of Munich, Germany.
    3. Sigita Grundiza & Dainis Stikuts & Olegs Tkacevs, 2005. "Cyclically Adjusted Balance of Latvia's General Government Consolidated Budget," Working Papers 2005/05, Latvijas Banka.
    4. Belegri-Roboli, Athena & Michaelides, Panayotis G., 2005. "The Basic Characteristics of the Regional Department of Attica and Estimates of Potential Output and Potential Labour," MPRA Paper 74452, University Library of Munich, Germany.
    5. Athena Belegri-Roboli & Panayotis Michaelides, 2007. "Estimating labour and output gap: evidence from the Athens Olympic Region in Greece," Applied Economics, Taylor & Francis Journals, vol. 39(19), pages 2519-2528.
    6. Aleksejs Melihovs & Gundars Davidsons, 2006. "The Role of Production Progress and Human Capital in the Economic Growth of Latvia," Working Papers 2006/03, Latvijas Banka.
    7. Michaelides, Panayotis & Milios, John, 2009. "TFP change, output gap and inflation in the Russian Federation (1994-2006)," Journal of Economics and Business, Elsevier, vol. 61(4), pages 339-352, July.
    8. Michaelides, Panayotis G. & Economakis, George & Milios, John G. & Maroudas, Leonidas & Aggelis, Vassilis, 2005. "Growth, Technological Change and Output Gap in Russia," MPRA Paper 74479, University Library of Munich, Germany.
    9. Belegri-Roboli, Athena & Demertzi, Aggeliki & Markaki, Maria & Michaelides, Panayotis G., 2011. "Labour Gap, Output Gap and Inflation by Economic Sector: The case of Greece and the Peloponnese Region (2000-2007)," MPRA Paper 74446, University Library of Munich, Germany.

    More about this item

    Keywords

    output gap; potential output; production function; NAWRU;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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