Potential Output is a key factor for debt sustaintability analysis and for developing strategies for growth, but unfortunately it is an unobservable variable. Using three methodologies (production function, switching, and state-space), this paper computes potential output for CAPDR countries using annual data. Main findings are: i) CAPDR potential growth is about 4.4 percent while output gap volatility is about 1.9 percent; ii) The highest-potential growth country is Panama (6.5 percent) while the lowest-growth country is El Salvador (2.6 percent); iii) CAPDR business cycle is about eigth years.
vary less than most models based on definition of cycle with frequency 6–32 periods, which contributes to realistic and interpretable magnitudes of the output gap.
Empirically, the unemployment lags output at business cycle frequencies, with lower amplitude and high coherence. This is one of the most robust stylised facts across most developed economies. Fig. 10 depicts output, capacity utilisation and unemployment (shift to lead by one quarter) after applying a low-pass filter (HP filter, λ = 1600 for simplicity 18 ) and scaled to outputgapvolatility, with a
. Accountability, quality of institutions, policy implementation ( Swiston and Barrot, 2011 ), resource misallocation and selection ( Hsieh and Klenow, 2009 ; Bartelsman et al., 2013 ), slow technology diffusion ( Howitt, 2000 ), and radical institutional reforms ( Acemoglu et al., 2011 ) are among the core concepts used to give explanation of growth performance.
This paper measures potential growth, output gap and outputgapvolatility for CAPDR countries using three different techniques. First, we have the production function approach, which decomposes GDP using employment
Francesco Furlanetto, Paolo Gelain, and Marzie Taheri Sanjani
The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization; optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.
shocks have much smaller effect on inflation under a flat Phillips curve. Therefore, interest rates need to move very little. The weak policy response makes the demand shock more persistent (the outputgapvolatility increases). Shocks to inflation cause greater volatility in both inflation and output, since unwinding the effect of such shocks requires more aggressive movement of interest rates and domestic demand. In the next section, this intuition is formalized (by presenting the efficient policy frontiers), and the interest rate rules that best match the