This appendix provides a detailed description of the alternative methods used to compute potential output and the output gap for Russia. A list (and a brief description) of each method, and corresponding assumptions is provided below. A probability distribution of output gaps and potential growth is built based on variations of alternative methods.
In order to have a benchmark, potential output is computed using a standard HP filter, with smoothing parameter 1600.
Baxter, M. and R. G. King, 1999, “Measuring Business Cycles: Approximate Band-pass Filters for Economic Time Series”, Review of Economics and Statistics, vol. 81, pages 575–593.
Benes, J., K. Clinton, R. Garcia-Saltos, M. Johnson, D. Laxton, P. Manchev, and T. Matheson, 2010, “Estimating Potential Output with a Multivariate Filter,” Working Paper 10/285, International Monetary Fund, Washington DC.
Blanchard, O., and D. Quah, 1989, “The Dynamic Effects of Aggregate Supply and Demand Disturbances,” American Economic Review, Vol. 79, pp. 655–673.
Cayen, Jean-Philippe & van Norden, Simon, 2005. “The Reliability of Canadian Output-Gap Estimates,” The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 373–393, December.
Cooley T.J., Dwyer, 1998, “Business Cycle Analysis without Much Theory: a Look at Structural VARs,” Journal of Econometrics, 83, 57–88.
Fuentes, Rodrigo, Fabian Gredig, and Mauricio Larrain. “Estimating the Output Gap for Chile.” Central Bank of Chile Working Paper No. 455, December 2007: 29.
Hodrick, R., and E. Prescott, 1997, “Post-War Business Cycles: An Empirical Investigation,” Journal of Money, Credit, and Banking 29, 1–16.
Marcet, Albert, and Morten Ravn. 2004, “The HP-Filter in Cross-Country Comparisons.” Discussion Paper Series No. 4244 (Centre for Economic Policy Research), 28.
Massimiliano, M. and A. Musso, 2011, “The Reliability of Real-Time Estimates of the Euro Area Output Gap,” Economic Modelling 28, pps. 1842–1856.
Nienke Oomes & Oksana Dynnikova, 2006. “The Utilization-Adjusted Output Gap: Is the Russian Economy Overheating?,” IMF Working Papers 06/68, International Monetary Fund.
Orphanides, Athanasios & van Norden, Simon, 2005, “The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time,” CEPR Discussion Papers 4830, C.E.P.R. Discussion Papers.
Orphanides, Athanasios & van Norden, Simon, 2002, “The Unreliability of Inflation of Output Gap Estimates in Real Time,” The Review of Economics and Statistics 84 (4), 569–583.
Fuentes et. al. (2007) provide a good explanation of key parameters affecting the amplitude of the cycle around the trend. Orphanides & van Norden (2002) also point out that multivariate filters are not more reliable than their univariate counterparts.
Details on alternative assumptions and parameterizations for the production function, and Okun’s law approach are provided in the appendix.
For details on each method, and different assumptions within and across methods, see appendix. OL (TV NAIRU) refers to “Okun law with time varying NAIRU”.
See appendix for an exposition of potential growth decomposition under alternative methods.
Okun coefficient is derived from a standard OLS regression, similar to Okun’s 1962. The dependent variable is the change in the unemployment rate, and the explanatory variables are: contemporaneous real GDP growth rate, lags 1 and 2 of real GDP growth, and lags 1 and 2 of the change in the unemployment rate.