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This paper is a revised and extended version of the paper “Revisiting the Estimation of the Chilean Output Gap,” (IMF, 2010). We would like to thank Pablo Garcia-Silva, Dora Iakova and Robert Rennhack for comments and suggestions, and Juan Pablo Medina and Roque Montero for sharing the data. All remaining errors are ours.
We estimate potential output in several different ways, each having its specific definition of potential output. See Section 3 for the precise definition of potential output for each technique.
It is usually computed as the percentage deviation of observed output from potential output as a percentage of potential output in any given period of time. Define observed output in period t as and potential output in period t as
Given data availability, natural resource real GDP includes mining (mainly copper and molybdenum), agricultural goods, and fisheries. About 80 percent of this production is related to mining.
Two lags are used, consistent with the standard lag order selection criteria (Akaike, Schwarz, and Hannan-Quinn). We have also added the price of copper as a third component in the VAR. However, the results were unaltered, so we decided to drop the latter configuration.
See Canales Kriljenko, Freedman, Garcia-Saltos, and Laxton (2009) for details.
By definition, potential output is composed of natural resource potential output and non-natural resource potential output.