MEASURING POTENTIAL GDP AND OUTPUT GAPS IN DEVELOPING ECONOMIES: METHODOLOGICAL ISSUES AND AN ANALYTICAL PRODUCTION FUNCTION PERSPECTIVE

Abstract

Although it is vital for macroeconomic research and policymakers to estimate potential GDP and production gaps, this task continues to be difficult owing to the unobservable nature of potential output and the fact that it is dependent on the methodological choices that are made. The issues are most noticeable in emerging economies, which are characterized by structural changes, external shocks, and data limits that make it difficult to determine the capacity for sustainable production. The purpose of this research is to investigate and build an analytical production-function framework for the purpose of evaluating potential GDP and output inequalities in emerging countries. Potential output is defined as a function of trend capital, labor, and total factor productivity. The research places a strong emphasis on the relevance of structural interpretability and medium-term sustainability, while also taking into consideration other estimating approaches as benchmarks for robustness.