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Estimating potential output and output gaps for the South African economy

  • Ben Smit

    ()

    (Department of Economics and Bureau of Economic Research, Stellenbosch University)

  • Le Roux Burrows

    ()

    (Department of Economics, Stellenbosch University)

An economy's level of potential output plays a central (and critical) role in the formulation of monetary policy focused on maintaining low and stable inflation. Assuming that potential output is determined mainly by the quantity and quality of its productive factors and the level of technology, it follows that potential output is related to the capacity of the economy to supply goods and services. Thus the growth rate of potential output is the rate of growth that the economy can sustain for long periods of time. If the economy grows at a different rate from the potential output, then inflation will tend to adjust in response to demand pressures. In modern macroeconomic theory, one of the key sources of inflationary pressure is the difference between aggregate demand and potential output which can be quantified as the percentage difference between actual output and potential output (or the output gap). If the output gap is positive inflation tends to rise and vice versa if the gap is negative. The problem, however, is that potential output cannot be directly observed. A variety of techniques are currently used in other countries to estimate potential output, including the use of the Hodrick-Prescott filter. In this paper the various available techniques will be surveyed and applied to South African data in order to generate an economy-wide measure of potential output and the output gap.

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File URL: http://www.ekon.sun.ac.za/wpapers/2002/wp052002/wp-05-2002.pdf
File Function: First version, 2002
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Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 05/2002.

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Date of creation: 2002
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Handle: RePEc:sza:wpaper:wpapers5
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  1. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  2. Guay, A & St-Amant, P, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Technical Reports 78, Bank of Canada.
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  6. Chantal Dupasquier & Alain Guay & Pierre St-Amant, 1997. "A Comparison of Alternative Methodologies for Estimating Potential Output and the Output Gap," Working Papers 97-5, Bank of Canada.
  7. Cote, D. & Hostland, D., 1996. "An Econometric Examination of the Trend Unemployment Rate in Canada," Working Papers 96-7, Bank of Canada.
  8. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
  9. Alain DeSerres, & Alain Guay & Pierre St-Amant, . "Estimating and Projecting Potential Output Using Structural VAR Methodology: The Case of the Mexican Economy," Working Papers 95-2, Bank of Canada.
  10. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  11. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
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