Estimates Of Russia’s Potential Output

Taking into consideration the specifics of the Russian economy such as dependency on oil and gas drilling & production, and including the current context of the Western sanctions, COVID-19 pandemic, as well as somewhat idiosyncratic potential output development, the main aim of this paper is to quantify recent output gap for Russia. We use three mainstream methodologies: the Hodrick-Prescott filter as a benchmark, the Kalman filter to follow, and the Cobb-Douglas production function. The sample time span ranges from 1995Q1 until 2020Q3, while all calculations are performed on quarterly frequencies. The analysis suggests that given low fixed investment ratios, limited R&D spending in non-military sectors, and adverse demographic development, under a “no policy change” scenario there might soon be even more downward pressures on the country’s potential output growth, and the economy may continue increasing only at a snail’s pace even after a possible withdrawal of the Western sanctions and the end of the COVID-19 pandemic.

Secular Stagnation and Income Distribution Dynamics

This paper contributes to the literature on secular stagnation by estimating a measure of potential output growth for the post-war US economy derived from a novel model specification that allows for the cyclical interactions between income distribution, represented by the trajectory of the labor share of income, and economic activity, as measured by capacity utilization. The results obtained show that potential output growth exhibits a gradual decline that predates the Great Recession and follows the downward trajectory of the labor share of income, thus suggesting the existence of an important long-run relationship between income distribution and output growth in the United States.

In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment

Using a standard New Keynesian model, we show that moderate side effects of zero lower bound (ZLB) policy suffice for positive lower bound (PLB) policy to pay off in terms of welfare, especially when central banks fail to commit. For given side effects of the ZLB, as the shock that makes the ZLB bind becomes larger and more persistent, the dominance of PLB policy over ZLB policy becomes more likely. The findings hold for flexible and rigid economies with both fast and slow potential output growth and low and high inflation targets.

What Happens if Central Banks Misdiagnose a Slowdown in Potential Output

In the last few decades, real GDP growth and investment in advanced countries have declined in tandem. This slowdown was not the result of weak demand (there has been no shift along the Okun curve), but of a decline in potential output growth (which has shifted the Okun curve to the left). We analyze what happens if central banks mistakenly diagnose the problem as insufficient demand, when it is actually a supply problem. We do this in a real model, in which inflation is not an issue. We show that aggressive central bank action may revive gross investment, but it will not revive net investment or growth. Moreover, low interest rates will lead to an increase in the capital output ratio, a low return on capital and high leverage. We show that these forecasts are in line with what has happened in major advanced countries.

Population Projection Revisions and Their Impact on Economic Growth – The Case of Malta

Typically, in short-term economic forecasts, population projections, and their related impact on the availability of labour, tend to be the most stable component. The scope of this paper is to show how in the case of Malta, the European Union’s smallest economy, migration flows have led to substantial revisions in population projections. Using the standard production function approach to estimate potential output growth, these revisions change very substantially expectations of economic expansion. Revisions in population projections are, in fact, estimated to have boosted Malta’s potential output growth in future years by as much as half a percentage point. While potential output is seen as a fairly stable variable for medium and large economies, it is more of a fluid concept for small open economies that are subject to large migration flows.

The UK Economy: Forecast Summary

The UK's future relationship with the European Union (EU) remains undecided. Brexit-related uncertainty has led to investment plans being deferred and increased stockbuilding.Under our main-case forecast, based on a ‘soft’ Brexit and continuing uncertainty, GDP growth continues at around 1½ per cent in 2019 and 2020, broadly in line with potential output growth, and the unemployment rate stays at around 4 per cent.CPI inflation is forecast to remain around 2 per cent per annum as faster unit labour cost growth is offset by slower import price inflation. With inflation stable at target, and only limited evidence of domestic inflationary pressure, Bank Rate remains at 0.75 per cent throughout this year before being raised to 1 per cent in the second half of 2020.We expect public spending to rise more quickly than currently planned. That, together with the forthcoming reclassification of student loans in the public finances, is likely to mean that the government's medium-term fiscal objectives will not be met.The current account deficit is forecast to fall from 4.2 per cent of GDP in 2019 to around 3 per cent in 2020, as domestic saving picks up relative to investment.