A semistructural approach to estimate South Africas potential output

Vafa Anvari, Nelne Ehlers and Max Steinbach

No 6504, Working Papers from South African Reserve Bank

Abstract: The impact of the global financial crisis on estimates of potential output, and specifically the usefulness of accounting for financial effects in the estimation process, deserves special consideration. In this paper possible paths that potential output may follow after the financial crisis are discussed and a finance-neutral potential output measure is proposed. This approach incorporates information from financial indicators in the cycle of economic activity and it is shown that when financial shocks are controlled for, the level of potential output is lower in the build-up to the financial crisis and thereafter. When compared to other frequently used methods to estimate potential output, this approach appears to deliver more reliable estimates of the output gap, particularly in real-time.

Date: 2014-11-24
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