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We test the sensitivity of the results by replacing the starting value of the perpetual inventory method with a capital-output ratio of 2 in 1995 as in the AMECO database. This leaves the overall growth path unchanged, but lowers/increases the contributions of TFP/capital by about 0.9 percentage points over the whole estimation period and about 0.2 percentage points in the last three projection years on average.
To address the end-point problem, IMF staff projections are used to extend the underlying series.
In turn, this means that the MVF-FIN is expected to produce wider output gaps in both, bust and boom periods for countries that experienced a financial cycle. However, this rests on the assumption that the permanent component of credit growth, which is explained by financial deepening, is not attributed to the cyclical component of output.
The very strong contraction in credit during recession years, in principle, should have temporarily restrained economic activity below normal levels, which means that sustainable output should be higher than suggested by the other models, hence making the output gap larger.
This assumes that the historical relationship between real GDP growth and PPP GDP per capita income convergence remains the same going forward,