The inherent uncertainties in output gap estimation a South African perspective

Cobus Vermeulen

No 11051, Working Papers from South African Reserve Bank

Abstract: Monetary policy actions require accurate real-time estimates of potential output and the output gap. Such estimates are, however, vulnerable to definitional uncertainty, choice of methodology and data revision. It is also not always clear whether changes in economic conditions reflect changes in actual or potential output; flawed output gap estimates could in turn lead to an inappropriate policy stance. This paper compares the SARBs current approach to estimating potential output and the output gap to the empirical literature. New estimates of the output gap and potential growth are also presented, concentrating on the impact of the COVID-19 pandemic on economic activity. Consistent with existing literature, these estimates detect a chronically negative annual output gap since 2009, which only closed briefly in 2018, and a steady decline in the potential growth rate since 2010. The COVID-19 shock has likely exacerbated existing structural economic weaknesses and led to massive negative output gaps, notably during 2020, and continuing into 2021.

Date: 2023-08-23
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