A dynamic model to estimate the long-run trends in potential GDP

Abstract

To estimate long-run growth based on the so-called potential GDP became a constant preoccupation among economists. However, one remaining problem in every long-run growth model is to estimate a persistent trend in labour productivity outside of it, in order to avoid the implicit circular relationship between actual productivity growth and potential level of production. Coming from recent literature on natural rate of unemployment estimation we used a specific methodology in order to estimate NAIRU in case of post-communist economies and based on it to evaluate the potential GDP. Taking into account that the “classic” Hodrick-Prescott method is in fact equivalent to an interpolation procedure, we used in our experiment other three filters demonstrating very similar output. Moreover, we conceived a simple autonomous model in order to estimate the growth of a so-called “pure” productivity independently from the actual level of employment and to compare its dynamics with that of natural rate of unemployment.natural rate of unemployment; potential GDP; pure productivity