Structural Breaks in Potential GDP Of Three Major Economies: Just Impaired Credit or the “New Normal”?

Alexander Apokin () and Irina Ipatova ()
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Alexander Apokin: National Research University Higher School of Economics
Irina Ipatova: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: This paper investigates the factors behind the recent growth slowdown (so-called Secular Stagnation) in the US, the euro area and Japan using the metrics of potential output growth. Specifically, our results offer limited support for an impaired credit transmission channel hypothesis (Reinhart and Rogoff, 2009a), while not supporting a supply slowdown hypothesis (Gordon, 2012). We propose a unified framework to test those hypotheses based on structural break tests of potential output. We estimate a variety of potential output growth models accounting for inflation, unemployment, and private credit dynamics (finance-neutral estimates) with multivariate Kalman filters and subject our estimates to structural break tests. We detect structural breaks between 2008 and 2010 for all three countries with Bai-Perron search procedure, the result being robust to the model specification and sample choice, with no significant difference between ordinary and finance-neutral estimates. We proceed with the Chen-Liu test to detect negative temporary change outliers in the Great Recession for the US and the euro area and negative level shift outliers for Japan. Moreover, original breaks in the Chen-Liu test disappear in the US and the euro area once we account for private credit and labour market dynamics, but do not change for Japan.

Keywords: New Normal; Secular Stagnation; Great Slump; potential GDP; Kalman filter; Bai-Perron test; Chen-Liu test (search for similar items in EconPapers)
JEL-codes: C53 E17 F44 O57 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016
New Economics Papers: this item is included in nep-eec, nep-ger and nep-mac
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Published in WP BRP Series: Economics / EC, July 2016, pages 1-35

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Persistent link: https://EconPapers.repec.org/RePEc:hig:wpaper:142/ec/2016

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