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This chapter was prepared by Henry Ma. Aung Thurein Win provided helpful research assistance. All calculations are based on data available as of December 15, 2000.
The output gap is defined as the difference between actual and potential output. Hence, a negative (positive) gap implies that actual output is below (above) potential.
The time-varying factor shares that Kim and Hong (1997) calculated from the national income accounts were also tried, but the results were unsatisfactory. One reason is that, for the earlier periods (i.e., the 1970s), the calculated shares may underestimate the share of labor, due to the presence of wage repression. As noted by Dornbusch and Park (1987), during that period: “… politics, certainly … left little room for organized labor and even less for union militancy.”
The perpetual inventory method described in Young (1995) was used. This method requires assumptions to be made regarding the initial capital stock and the depreciation rates (6 percent per annum). However, over a sufficiently long period of estimation (as in this case), the development of the capital stock series becomes relatively invariant to initial assumptions. In fact, the estimated growth rates of capital turn out to be quite close to estimates made by Kim and Mun (1999).
For all three estimates of the output gap in this paper, estimated potential output was compared to the seasonally adjusted real GDP series provided by the Bank of Korea.
Time series tests (not shown) indicate that the null hypothesis of a unit root in the level of output gap can be rejected for all three measures of the output gap, and that inflation becomes stationary after being differenced once.
However, the F statistics are quite close to the 5 percent confidence level, suggesting that the two measures of the output gap may nevertheless provide useful information to monetary policymakers.