Potential growth in France and the euro area: an overview of the estimation methods

Matthieu Lequien and A. Montaut
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A. Montaut: Insee

Documents de Travail de l'Insee - INSEE Working Papers from Institut National de la Statistique et des Etudes Economiques

Abstract: At the end of 2013, the French GDP is only slightly higher than in the pre-crisis peak of 2008. Which part of the loss of activity is definitive? Providing an answer to this question brings to the fore two unobserved variables: potential GDP and output gap. These variables are difficult to estimate, especially on recent years, which calls for several estimation techniques. Four approaches are mobilized here: (A) the usual production function approach with two factors, capital and labor; (B) a variant thereof with a factor production, labor; (C) a multivariate filter improved with economic indicators and (D) a direct estimation of the output gap through a principal component analysis. According to these approaches, potential growth in France would lie between 0.7 % and 1.3% in 2014 and the output gap would be negative, between -2.3 and -3.5 GDP points in 2013, which signals capacity for economic rebound but confirms as definitive most of the loss of activity observed since the crisis. For the euro area, potential growth would stand between 0.2% and 0.7% in 2014 and the demand deficit would be close to the French one. These approaches all have pros and cons. They deliver different readings of the recent past. Thus, approaches (B) and (D) signal a loss of potential GDP concentrated at the time of crisis, followed by a recovery stronger than suggested by the two others approaches.

Keywords: potential growth; potential output; output gap; production function; employment equation; state space model; principal component analysis; financial crisis (search for similar items in EconPapers)
JEL-codes: C32 E22 E32 E60 O47 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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