Estimating Potential Output with a Production Function for France, Germany and Italy

Abstract

This paper discusses the supply conditions for economic growth in terms of potential GDP estimated by the production function approach for France, Germany and Italy for the 1986:2003 period. The aim of this study is twofold: first, we keep a consistent framework as regards national account institutional sectors. Second, after defining Total Factor Productivity (TFP) in the so-called productive sector from the Solow residual, we specify it in a general framework for the three countries as a function of a time trend corrected for the effects of the age of equipments and the capacity utilisation rate (CUR). This framework allows to distinguish temporal considerations: in the medium to long term, the variables that could generate short to medium term fluctuations in potential output growth are assumed to be stable at a structural level. This implies modifications of the functional specifications related to the time horizon.