Output gap measurement: A Production function approach

Muhammad Rehman (), Kalim Hyder () and Fayyaz Hussain ()
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Muhammad Rehman: State Bank of Pakistan
Kalim Hyder: State Bank of Pakistan
Fayyaz Hussain: State Bank of Pakistan

No 116, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This paper applies production function approach to estimate the potential output and output gap for the Economy of Pakistan. The univariate method yield biased results induced by structural changes in the economy. The total factor productivity, capital utilization and adjusted labor force are the key determinants of potential output, which is estimated by using the Kalman filter method.The results indicate that the potential output of Pakistan’s economy is around 4.2 percent that may increase to 4.4 and 5.1 percent depending upon the capital accumulation strategy and its positive spillover.

Keywords: Potential output; output gap; production function; China Pakistan Economic Corridor (search for similar items in EconPapers)
JEL-codes: E10 E20 E23 E24 E37 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2025-07
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