Estimating potential output and output gaps for the South African economy

Stellenbosch Working Paper Series No. WP05/2002
 
Publication date: 2002
 
Author(s):
[protected email address] (Department of Economics and Bureau of Economic Research, Stellenbosch University)
[protected email address] (Department of Economics, Stellenbosch University)
 
Abstract:

An economy's level of potential output plays a central (and critical) role in the formulation of monetary policy focused on maintaining low and stable inflation. Assuming that potential output is determined mainly by the quantity and quality of its productive factors and the level of technology, it follows that potential output is related to the capacity of the economy to supply goods and services. Thus the growth rate of potential output is the rate of growth that the economy can sustain for long periods of time. If the economy grows at a different rate from the potential output, then inflation will tend to adjust in response to demand pressures. In modern macroeconomic theory, one of the key sources of inflationary pressure is the difference between aggregate demand and potential output which can be quantified as the percentage difference between actual output and potential output (or the output gap). If the output gap is positive inflation tends to rise and vice versa if the gap is negative. The problem, however, is that potential output cannot be directly observed. A variety of techniques are currently used in other countries to estimate potential output, including the use of the Hodrick-Prescott filter. In this paper the various available techniques will be surveyed and applied to South African data in order to generate an economy-wide measure of potential output and the output gap.

 
JEL Classification:

E32, C22, C53

Keywords:

Potential output, inflation, output gaps, South Africa

Download: PDF (115 KB)

Login

(for staff & registered students)



Need a password?
Forgot your password?

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

26 January 2024
Domestically, the theme of the week centred around monetary policy and inflation, with the SA Reserve Bank (SARB) making its first repo rate decision of the year on Thursday. Furthermore, Stats SA released both consumer and producer price inflation data for December. Globally, monetary policy was also important, with the European Central Bank (ECB),...

Read the full issue
 

Upcoming Seminars

No seminars are currently listed. Please check back soon.
 
More...

BER Weekly

26 January 2024
Domestically, the theme of the week centred around monetary policy and inflation, with the SA Reserve Bank (SARB) making its first repo rate decision of the year on Thursday. Furthermore, Stats SA released both consumer and producer price inflation data for December. Globally, monetary policy was also important, with the European Central Bank (ECB),...

Read the full issue