3/2010 Rasmus Kattai. Potential output and the output gap in Estonia - A macro model based evaluation

Working Papers of Eesti Pank. No. 3/2010

There have been several data revisions to the output statistics in Estonia during the past six years as methodologies have been harmonised. These changes are significant enough to require corrections to the earlier understanding of Estonia's potential economic growth rate. In this paper the latest data vintage from 2009 is used to estimate Estonia's potential output growth and output gap. The production function approach that has been used shows that the gap varies quite extensively, ranging from -8% in 1999 to +8% in 2007, while the average potential growth rate in 1997-2009 was around 6%. The macro model simulations expect the potential growth rate to fall in the future. The fall in the marginal productivity of production inputs makes growth slow to about 4-5% in the next five years, if there are no additional shocks to the economy.
JEL Code: E32, F43
Key words: potential output, potential growth, output gap

Author's e-mail address: rasmus.kattai [at] eestipank.ee

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.

Contents

1. Introduction
2. Measuring potential output and the output gap
3. Projection of potential growth and the output gap
4. Conclusions
References
Appendices
Appendix 1. Output revisions

Potential Output and the Output Gap in Estonia - A Macro Model Based Evaluation, Working Papers of Eesti Pank No 3/2010 (PDF*)

* To read PDF file, you need Adobe® Acrobat® Reader™ freeware, it may be downloaded from Adobe homepage.