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Output gap measurement: A Production function approach

Author

Listed:
  • Muhammad Rehman

    (State Bank of Pakistan)

  • Kalim Hyder

    (State Bank of Pakistan)

  • Fayyaz Hussain

    (State Bank of Pakistan)

Abstract

This paper applies production function approach to estimate the potential output and output gap for the Economy of Pakistan. The univariate method yield biased results induced by structural changes in the economy. The total factor productivity, capital utilization and adjusted labor force are the key determinants of potential output, which is estimated by using the Kalman filter method.The results indicate that the potential output of Pakistan’s economy is around 4.2 percent that may increase to 4.4 and 5.1 percent depending upon the capital accumulation strategy and its positive spillover.

Suggested Citation

  • Muhammad Rehman & Kalim Hyder & Fayyaz Hussain, 2025. "Output gap measurement: A Production function approach," SBP Working Paper Series 116, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:116
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    File URL: https://www.sbp.org.pk/publications/wpapers/2025/116.pdf
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    Keywords

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    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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