MODELLING ROMANIA’S POTENTIAL GDP GROWTH RATE AND OUTPUT GAP

Dan Armeanu (), Leonard Lache (), Mihaela Mitroi (), Carmen Pascal () and Andreea Cristina Doia ()
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Dan Armeanu: The Bucharest University of Economic Studies
Leonard Lache: The Bucharest University of Economic Studies
Mihaela Mitroi: The Bucharest University of Economic Studies
Carmen Pascal: The Bucharest University of Economic Studies
Andreea Cristina Doia: The Bucharest University of Economic Studies

Internal Auditing and Risk Management, 2016, vol. 42, issue 1, 25-33

Abstract: In today’s complex economic decision making environment, the unobservable concepts of potential GDP growth and output gap are paramount to economic policies and have a significant impact on central bank and government actions. Despite being relatively easy to grasp from a conceptual standpoint, the potential output and the output gap are quite difficult to measure and the choice between the many competing models that can be used in practice, as well as the expert opinions imposed to the models may lead to very different results and to radically different policy choices. Apart from these issues, measuring the output gap in developing economies is further complicated by the lack of reliable statistical data and a short time horizon mover which to validate complex macroeconomic relationships that are used by more sophisticated approaches (i.e., multivariate filters). For this reason we propose two straightforward methods of estimating the potential GDP and the output gap: one based on a simple Hodrick-Prescott filter and one based on an extended Kalman filter with certain restrictions imposed to the cyclical component.

Keywords: potential GDP; potential economic growth rate; output gap; extended Kalman filter; trend component; cyclical component (search for similar items in EconPapers)
Date: 2016
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