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The Pillars of Potential Growth and the Role of Policy: A Panel Data Approach

Author

Listed:
  • Matteo Lanzafame

    (University of Messina)

  • Jesus Felipe

    (Asian Development Bank)

  • Noli Sotocinal

    (Asian Development Bank)

  • Connie Bayudan-Dacuycuy

    (Ateneo de Manila University)

Abstract

Potential output growth generally decelerated after the global financial crisis during 2008–2009. This paper examines the possible determinants of potential output growth using Bayesian Model Averaging and assesses how the determinants can be used to increase the growth of potential output. It finds that the long-term growth of working-age population, the tertiary level gross enrollment ratio, the technology gap with the United States (US), labor market rigidity, trade openness, financial integration and the quality of institutions robustly affect potential output growth. Using Harrod’s definition of potential output growth as the sum of the long-run growth rates of the labor force and labor productivity, we find that the trend growth rate of working-age population is a good proxy variable for long-run labor force growth. Under this definition, the other determinants affect potential output growth through their impact on the growth of labor productivity. The paper finds support for the hypotheses that tertiary enrollment and trade openness affects potential output growth nonlinearly. It also finds that trade openness and tertiary enrollment have nonlinear effects on potential output growth, and that the technology gap with the US and financial integration have statistically significant interaction effects on potential output growth. Results suggest that reforms aimed at reducing the technology gap with the US and increasing the extent of financial integration have lower impact on countries with high-quality institutions.

Suggested Citation

  • Matteo Lanzafame & Jesus Felipe & Noli Sotocinal & Connie Bayudan-Dacuycuy, 2016. "The Pillars of Potential Growth and the Role of Policy: A Panel Data Approach," ADB Economics Working Paper Series 482, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0482
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    References listed on IDEAS

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    Cited by:

    1. Sarsen Zhanabekov, 2022. "Robust determinants of the shadow economy," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 1017-1052, October.
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    3. Roberta De Santis & Piero Esposito & Elena Masi, 2017. "Are There Common Structural Determinants of Potential Output Growth in Europe?: An empirical exercise for 11 EMU countries," LEAP Working Papers 2017/4, Luiss Institute for European Analysis and Policy.
    4. Neil Foster-McGregor & Bart Verspagen, 2016. "The Role of Structural Transformation in the Potential of Asian Economic Growth," ADB Economics Working Paper Series 479, Asian Development Bank.

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    Keywords

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    JEL classification:

    • O29 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Other
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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