Growth accounting for the euro area

This article is concerned with the estimation of euro area potential output growth and its decomposition according to the sources of growth. The growth accounting exercise is based on a multivariate structural time series model which combines the decomposition of total output according to the production function approach with price and wage equations that embody Phillips-type relationships linking inflation and nominal wage dynamics to the output gap and cyclical unemployment, respectively. Assuming a Cobb?CDouglas technology with constant returns to scale, potential output results from the combination of the trend levels of total factor productivity (TFP) and factor inputs, capital and labour (hours worked), which is decomposed into labour intensity (average hours worked), the employment rate, the participation rate and population of working age. The nominal variables (prices and wages) play an essential role in defining the trend levels of the components of potential output, as the latter should pose no inflationary pressures on prices and wages. The structural model is further extended to allow for the estimation of potential output growth and the decomposition according to the sources of growth at different horizons (long run, medium run and short run); in particular, we propose and evaluate a model-based approach to the extraction of the low-pass component of potential output growth at different cut-off frequencies. The approach has two important advantages: the signal extraction filters have an automatic adaptation property at the boundaries of the sample period, so that the real-time estimates do not suffer from what is often referred to as the ??end-of-sample bias??. Secondly, it is possible to assess the uncertainty of potential output growth estimates with different degrees of smoothness.     

NEW ESTIMATES OF THE U.S. ECONOMY'S POTENTIAL GROWTH RATE

Using an Okun's law framework, the analysis here estimates potential growth for the 1990s as measured by both fixed- and chain-weighted GDP. It then decomposes estimated potential growth rates into labor productivity growth (LPG) and labor input growth (LIG) using a regression analysis to separate secular from cyclical changes. It compares estimates of potential output and trend productivity growth for the 1990s with estimates from earlier periods. Results indicate that eliminating the substitution bias associated with fixed-weight measures of real GDP raises estimated potential GDP growth in the 1980s but lowers it in the 1990s. A slowdown in labor force growth, with little or no change in long-term productivity growth, largely accounts for the implied slowdown in potential growth.     

India’s Potential Output Revisited

Estimates of potential output have been revised downward across countries in the post-crisis period. In India, the debate on potential GDP and output gap has been intensified in the wake of revision in the GDP estimates with change in base year as well as the underlying methodology consistent with international best practices. In light of these, an attempt has been made for the first time in India to estimate potential GDP and output gap on a quarterly basis by using production function approach in addition to revisiting the estimates of potential output by conventional statistical methods for the period 1980Q2–2015Q4. The findings suggest that India’s potential growth, which had accelerated to around 8 % during 2003–2008, decelerated considerably in the aftermath of the global financial crisis to about 7 % during 2009–2015, mainly due to decline in contribution of total factor productivity and deceleration in the growth of capital stocks. The estimates further suggest that output gap, i.e. the percentage deviation of actual output from its potential level, has been negative since Q3 of 2012, though the gap is closing slowly. Key to accelerate growth as well as potential output in India lies with higher level of capital formation as its contribution dominates vis-à-vis the contribution of labour and total factor productivity.

     

The European refugee crisis and the natural rate of output

The European Commission follows a harmonized approach for calculating structural (potential) output for EU member states that takes into account labour as an important ingredient. This article shows how the recent huge migrants’ inflow to Europe affects trend output. Due to the fact that the immigrants immediately increase the working population but effectively do not enter the labour market, we illustrate that the potential output is potentially upward biased without any corrections. Taking Germany as an example, we find that the average medium-term potential growth rate is lower if the migration flow is modelled adequately compared to results based on the unadjusted European Commission procedure.     

Accounting for Growth and Output Gaps: Evidence from New Zealand

We evaluate New Zealand's macroeconomic performance over the 1967–1996 period, which witnessed numerous economic reforms. Using both index–number and econometric techniques, we decompose nominal GDP growth and the output gap into contributions from price level changes, productivity growth and changes in factor utilisation. Changes in domestic prices accounted for four–fifths of the growth in nominal GDP, while capital accumulation and employment growth were the most important factors determining real–output growth. Deviations in the domestic price level around its long–run trend contributed most heavily to changes in the nominal output gap. The real gap was influenced in any year variously by deviations of the terms of trade and labour input from their long–run trends, as well as by productivity shocks.     

How fast can China grow? The Middle Kingdom's prospects to 2030

Given its size and importance for global commodity markets, the question of how fast China can grow over the medium term is an important one. Using a Cobb–Douglas production function, we decompose the growth of trend GDP into those of the capital stock, labour, human capital and total factor productivity (TFP) and then forecast trend output growth out to 2030 using a bottom‐up approach based on forecasts that we build for each one of these factors. Our paper distinguishes itself from existing work in that we construct a forecast of Chinese TFP growth based on the aggregation of forecasts of its key determinants. In addition, our analysis is based on a carefully constructed estimate of the Chinese productive capital stock and a measure of human capital (based on Chinese wage survey data) that better reflects the returns to education in China. Our results suggest that Chinese GDP growth will slow from around 7% currently to approximately 5% by 2030, consistent with a gradual rebalancing of the Chinese economy characterized by a decline in the investment rate. Moreover, our findings underscore the growing importance of TFP growth as a driver of Chinese growth.     

Stagnation or transformation of a dual economy through endogenous productivity growth

A growth model is developed for an open dual economy. The economyexpands owing to a higher growth rate of labour productivityin the modern sector through the Kaldor–Verdoorn channeland higher effective demand through a Keynesian channel. Themodel incorporates a retardation mechanism affecting the slopesof productivity and output growth schedules as labour surplusand economies of scale diminish. A wage-led or profit-led regimeand initial conditions may give rise to: de-industrializationin terms of both output and employment; a growth trap sustaininga situation of structural heterogeneity; or sustainable employmentand adequate output and productivity growth.     

Unemployment and growth: some empirical evidence from structural time series models

This study investigates the empirical relationship between unemployment and growth in a number of OECD economies. A structural time series model is used for labour productivity growth to demonstrate that, in most economies, there seems to be a negative correlation between unemployment and labour productivity growth. The results provide little support for the theory that recessions may stimulate productivity growth. The use of a structural time series approach allows an attempt to model the underlying dynamics of productivity growth jointly with the effect of unemployment.     

Comparisons of real output and productivity of Chinese and Indian manufacturing, 1980–2002

The principal objective of this paper is to compare the real output and labour productivity of Chinese and Indian manufacturing from 1980 to 2002. Using an industry-of-origin approach, purchasing power parities (PPPs) for the benchmark year 1985 are derived from the Chinese and Indian industrial censuses. In turn, the PPPs are used to convert Indian manufacturing GDP into Chinese yuan for direct comparisons. Secondary objectives are twofold: first, to set this direct comparison within the general context of the economic policy reform process followed in each country, and second, to compare and contrast the organisation and structure of both countries' manufacturing sectors. The analysis shows that since 1980, real value added and labour productivity growth for Chinese manufacturing has been well above Indian levels.     

Lessons for Europe from the U.S. Growth Resurgence

This paper analyses the sources of U.S. labour productivitygrowth in the late 1990s and presents projections for both outputand labour productivity growth. We show that investment in informationtechnology (IT) played a substantial role in the U.S. productivityrevival and that similar trends are evident in data for otherleading OECD countries. We then outline a methodology for projectingtrend output and productivity growth for the broadly definedU.S. economy. Our base-case projection puts trend productivitygrowth at 1.78 percent per year over the next decade with arange of 1.14 to 2.38 percent, reflecting fundamental uncertaintiesabout the rate of technical progress in IT-production and investmentin IT-equipment and software. Our central projection is belowthe average growth rate of 2.07 percent during 1995 -2000. Similarprojections for Europe must await more complete information.(JEL J2)     

Modernization,Heterogeneity and Employment in Mexico

The principal objective of this paper is to study the effects of Mexico's recent economic reforms on employment and labour productivity. The author argues that the globalization and modernization entailed by the reforms tended to accentuate the structural heterogeneity and the differentials in productivity levels between different sectors.While in formal activities the growth rate of labour productivity accelerated, the contrary occurred in informal activities. Given the relatively moderate rate of increase in output and employment of formal activities, it is very likely that the greater heterogeneity has contributed to the decrease in the average growth rate of labour productivity as observed in Mexico in the period studied.     

MODELLING A REGIME‐SHIFTING BEVERIDGE CURVE

This paper offers new insights into Beveridge curve analysis by modelling the unemployment–vacancy rate relationship within a Markov regime‐switching environment in which the probabilities of curve‐shifting are determined endogenously by shift factors. Shift factors include structural factors such as labour market participation and net migration, while cyclical variables include GDP growth, the real rate of interest, and labour productivity. This approach enables us to estimate regime‐specific parameters and to assess the role played by these factors in influencing the transition probabilities of switching between regimes. Using New Zealand data, we show that increases in the participation rate have shifted the Beveridge curve inward, while increases in net migration have shifted the curve outward.     

On competing theories of economic growth: cross-country evidence

In the recent literature on economic growth, four approaches compete to explain growth trends in per capita GDP of the world set of countries: (1) the Solovian approach; (2) the New Theory of Endogenous Growth; (3) the Abramovitz–Baumol ‘catching up’ approach; (4) the Kaldor approach of increasing returns and cumulative causation. Approaches (3) and (4) are formalized here in a single model and then tested against approaches (1) and (2) on a common database and sample of countries. The main conclusions are the following: that labour is not the limiting factor on growth, as implied by (1) and (2); that catching up is an important and a non-declining process; that increasing returns to output rather than to capital are very important and accelerate the catch-up with the US trend; that a lack of social capabilities and technological push may reverse catching up into falling behind with respect to the US productivity level; and that the pattern of growth changes between 1960–73 and 1973–88 because physical investment becomes less important while R&D becomes more important, and because cumulative causation through export growth ceases.     

Tax decentralization,labour productivity,and employment in OECD countries

Tax decentralization should improve the efficiency of local governments and ultimately boost output growth. However, the empirical evidence is mixed. Decomposing output growth into labour productivity and employment growth, we show that the ultimate effect of fiscal decentralization on growth depends on which factor prevails, thus rendering the direct estimation of tax decentralization on growth ambiguous. Using an instrumental variable approach, with instruments based on institutional similarities and geographic distance, the empirical analysis on a sample of 20 OECD countries shows that the positive and significant effect of tax decentralization on the employment growth rate is offset by the reduction of labour productivity growth, resulting in the absence of any statistically significant effect on output growth.     

Labour quality in Taiwan: measurement and contribution to economic growth

This article compiles labour input indices that capture both employment changes and quality improvement of labour in Taiwan, from 1994 to 2011. Up to 77.19% of average annual labour input growth is from quality improvement. Further decomposition reveals that the most important source of growth is educational attainment, followed by age structure. Moreover, we find that Taiwan’s average annual GDP growth rate does not result from capital investment but from the contribution of a stable labour input to economic growth. Taiwan is a newly industrialized country, but because of the diminishing returns to capital, the catch-up effect has been slower than hoped. Additional capital investment has a relatively small effect on productivity, and the main source of the continuous economic growth rate is from labour quality, especially from highly skilled human capital. Making good use of these human resources creates a stable source of sustained economic growth.     

Forecasting output gaps in the G-7 countries: the role of correlated innovations and structural breaks

Trend GDP and output gaps play an important role in fiscal and monetary policy formulation, often including the need for forecasts. In this article, we focus on forecasting trend GDP and output gaps with Beveridge-Nelson trend-cycle decompositions trend-cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks. We evaluate expanding window, one-step-ahead forecasts indirectly for the G-7 countries on the basis of real GDP growth rate forecasts. We find that correlated innovations affect real GDP growth rate forecasts positively, while allowing for structural breaks works for some countries but not for all. In the face of uncertainty, the evidence supports that in making forecasts of trends and output gap policy-makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks.     

Labour productivity trends in Australian manufacturing: some time series properties

Labour productivity plays a significant role in economic growth, labour demand and employment situation of a particular economy. In this light, the presence of a structural break in productivity, and its unit root property, has important consequences for the overall economy and in major sectors such as manufacturing. In this article, using some recently developed unit root tests, we examine: (i) the null hypothesis of a unit root in the log-level of labour productivity for 38 manufacturing subdivisions against the alternative of trend stationarity over a three-decade period; and (ii) the presence of a structural break in the series, and whether the break has had a permanent or a transitory effect on manufacturing labour productivity. Our main finding is that shocks to labour productivity have had a transitory effect, implying that policies are likely to have only short-term effects.     

Causal relationship between apparel exports and macroeconomic factors

Apparel exports make a significant contribution to economic growth in major apparel exporting economies such as Bangladesh, Sri Lanka and Vietnam. This study aims to investigate the causal relationship between apparel export growth and its determinants such as GDP growth, infrastructure, financial development, foreign direct investment (FDI) and labour productivity using panel data from 11 major apparel exporting countries for the period 1996 to 2013. The results confirm a long-run equilibrium association among the variables and reveal that GDP growth, infrastructure, financial development, FDI, and labour productivity have a significant positive influence on apparel export growth. Furthermore, the heterogeneous panel non-causality test results suggest that GDP growth, infrastructure and labour productivity contribute to apparel export growth in the short-run. These findings have several policy implications for the governments of the countries under study.     

Structural Change in Advanced Nations: A New Set of Stylised Facts*

We provide new evidence on patterns of structural change in advanced economies, reconsidering the stylised facts put forward by Kaldor (1963) , Kuznets (1971) , and Maddison (1980) . Since 1980, the services sector has overwhelmingly predominated in the economic activity of the European Union, Japan, and the US, but there is substantial heterogeneity among services. Personal, finance, and business services have low productivity growth and increasing shares in employment and GDP. By contrast, shares of distribution services are constant, and productivity growth is rapid. We find that the labour share in value‐added is declining, while the use of ICT capital and skilled labour is increasing in all sectors and regions.     

Output gaps

What is the output gap? I discuss three alternative definitions: the deviation of output from its long-run stochastic trend (i.e., the “Beveridge–Nelson cycle”); the deviation of output from the level consistent with current technologies and normal utilization of capital and labor input (i.e., the “production-function approach”); and the deviation of output from “flexible-price” output (i.e., its “natural rate”). Estimates of each concept are presented from a dynamic–stochastic–general-equilibrium (DSGE) model of the U.S. economy used at the Federal Reserve Board. Four points are emphasized: The DSGE model’s estimate of the gap (for each definition) is very similar to gaps from policy institutions, but the model’s estimate of potential growth has a higher variance and substantially different covariance with GDP growth; the change in the Beveridge–Nelson trend covaries negatively with the change in the gap in the DSGE model, providing a structural model estimate of a controversial parameter; in this model, estimates of the natural-rate concept are similar to those based on the Beveridge–Nelson and production function approaches; and the estimate of the output gap, irrespective of definition, is closely related to unemployment fluctuations.