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Jiri Podpiera, Ms. Faezeh Raei, and Ara Stepanyan
Was the postcrisis growth slowdown in Central, Eastern and Southeastern Europe (CESEE) structural or cyclical? We use three different methods—production function approach, basic multivariate filter, and multivariate filter with financial frictions—to evaluate potential growth and output gaps for 18 CESEE countries during 2000-15. Our findings suggest that potential growth weakened significantly after the crisis across most countries in the region. This decline appears to be largely due to stagnant productivity and weaker capital accumulation, which were associated with common external factors, including trading partners’ slow potential growth, but also decline in global trade and stalled expansion of global value chains. Our estimates suggest that output gaps in 2015 were largely closed in many countries in the region.
International Monetary Fund. European Dept.

variables (MVF-FIN) explicitly factors in the long-recognized impact financial cycles may have on the real economy (e.g. Aikman et al, 2011 ; Claessens et al, 2011 ). If swings in output coincide with swings in credit growth, when inflation and inflation expectations are aligned, the filter will attribute this to the cyclical component and thus produces a more stable “finance-neutral” level of sustainable output. 3 However, if credit provides little additional information, the model will produce results in line with conventional approaches. It thus avoids the pitfall

Jiri Podpiera, Ms. Faezeh Raei, and Ara Stepanyan

, in addition to inflation and capacity utilization, to obtain sustainable output estimates (denoted throughout as MVF-FIN). 7 The main idea behind this approach is to use the link between financial and output cycles as an additional information to identify demand and supply shocks. When inflation and inflation expectations are aligned but financial variables depart from their sustainable level, the filter assigns a larger portion of the actual output to the cyclical component. In this way, it offers a reduced-form approach to capturing the link between financial

International Monetary Fund. European Dept.
This paper discusses potential growth and its drivers for Latvia 6 years after the growth turnaround and presents projections for the medium term. As the labor force is projected to decline, implementation of policies to increase investment and support total factor productivity (TFP) growth will be essential to ensure income convergence going forward. The level of potential growth has direct consequences for Latvia’s convergence path. Latvia’s GDP per capita was about 62 percent of the EU-15 average in 2015. A better understanding of potential output is important for policy setting. For example, an estimate of the output gap enters the fiscal reaction function through the cyclical adjustment of the fiscal balance and therefore directly influences policy makers’ assessments of whether fiscal policy should respond to deviations from potential. Potential output is an elusive concept and can be defined in various ways. Potential output is generally defined according to the Okun concept as the level of output consistent with stable inflation, while short-run deviations of actual from potential output, due to the slow adjustment of wages and prices to shocks, reflect the output gap—or economic slack.
International Monetary Fund. Asia and Pacific Dept

estate data for Vietnam). Vietnam: MVF-FIN, 2005–2020 (In percent) Sources: Authorities’ Data and IMF Staff estimates 7. Sustainable output growth is estimated at 6.4 percent in 2017, marginally lower than with other methods . This is consistent with the selected issues paper “Vietnam: Credit Growth and Asset Market Valuations”, which finds that asset price and credit growth appear to be stronger than warranted by fundamentals. However, the methodology contains some weaknesses that could be leading to an underestimation of the size of the financial

International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper seeks to assess how this transformation has affected its growth potential. Employing a range of methodologies, the analysis concludes that Vietnam’s medium-term growth potential has increased from 6.2 percent estimated in 2014 to 6.5 percent. Acceleration of reforms that have generated productivity gains in the last decade, including the implementation of agreed free trade agreements, could further boost growth potential. The four methodologies provide a range of estimates for Vietnam’s potential output. On balance, we assess the potential growth estimate in Vietnam to be at 6.5 percent in 2017, higher than previous staff estimates of 6.2. The output gap is estimated at 0.4 percent in 2017. This analysis will be extended further in a forthcoming paper. The production function estimates can be further improved by explicitly incorporating the effect of structural transformation due to labor reallocation into the model, and by better accounting for the impact of the quality of human capital accumulation by taking the quality of education into account. Improvements in data quality, for example, on real estate prices, quarterly gross domestic product, unemployment rate and labor force in the informal sector, and capacity utilization, could further enhance the analysis.
International Monetary Fund. European Dept.
This 2017 Article IV Consultation highlights that Latvia’s economic growth eased to 2 percent in 2016, as gross investment contracted significantly by 11.7 percent on the back of lower than expected absorption of European Union (EU) funds. This effect was compounded by a drag from net exports, as import volume growth accelerated markedly, while export growth remained modest. Despite a strong rise in imports, the current account recorded a surplus of 1.5 percent in 2016 as the terms of trade, driven largely by falling energy prices, improved by over 4.7 percent. Growth is expected to pick up to 3.2 percent in 2017 on the back of an accelerated pace of disbursement of EU funds and continued robust private credit growth.