The Pillars of Potential Growth and the Role of Policy: A Panel Data Approach

Matteo Lanzafame, Jesus Felipe (), Noli Sotocinal and Connie Bayudan-Dacuycuy

No 482, ADB Economics Working Paper Series from Asian Development Bank

Abstract: Potential output growth generally decelerated after the global financial crisis during 2008–2009. This paper examines the possible determinants of potential output growth using Bayesian Model Averaging and assesses how the determinants can be used to increase the growth of potential output. It finds that the long-term growth of working-age population, the tertiary level gross enrollment ratio, the technology gap with the United States (US), labor market rigidity, trade openness, financial integration and the quality of institutions robustly affect potential output growth. Using Harrod’s definition of potential output growth as the sum of the long-run growth rates of the labor force and labor productivity, we find that the trend growth rate of working-age population is a good proxy variable for long-run labor force growth. Under this definition, the other determinants affect potential output growth through their impact on the growth of labor productivity. The paper finds support for the hypotheses that tertiary enrollment and trade openness affects potential output growth nonlinearly. It also finds that trade openness and tertiary enrollment have nonlinear effects on potential output growth, and that the technology gap with the US and financial integration have statistically significant interaction effects on potential output growth. Results suggest that reforms aimed at reducing the technology gap with the US and increasing the extent of financial integration have lower impact on countries with high-quality institutions.

Keywords: determinants of growth; potential output growth; reforms (search for similar items in EconPapers)
JEL-codes: O29 O41 O43 O47 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2016-05-26
New Economics Papers: this item is included in nep-eff
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Citations: View citations in EconPapers (4)

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