Abstract
The paper deals with the possible impact of the 2008-2009 financial and economic crisis on the potential output in the Czech Republic. Given the general difficulty in sketching out all the consequences of the crisis itself, the article is primarily focused on the labour market, which is regarded as an important driving force in terms of potential output fall or its growth slowdown. First, principal reasons why the potential output could have been hit by the 2008-2009 crisis are discussed in detail. The paper then analyzes a number of transmission mechanisms through which potential output could be generally impacted by severe recessions. Further, the output gap of the Czech Republic is estimated and a potential output development is drawn up. Finally, an approximate impact of the crisis on the potential product through the labour market is demonstrated. The results show that the potential output in the Czech Republic has been partially and temporarily affected in volume. This is specifically due to an adverse long-term unemployment and, to a much lesser extent, employment behaviour, in both cases seemingly in relation to the recent crisis. Likewise, Okun´s law has been found to be relatively weak in the case of the Czech economy, thus further supporting the hysteresis explanation. However, such a drop in potential output will likely not persist in the long run, provided that appropriate economic policies - in particular aiming at re-integration of long-term unemployed/discouraged workers and an increase in the employment and participation rates ? are implemented.
Highlights
Economic science is incessantly witnessing controversy about how to define potential output, with some economists stating it is completely impossible, and others essentially claiming it is relatively simple and straightforward
Since the crisis is still somewhat present in the economy – mainly in the form of anaemic output growth and higher rates of unemployment in a number of developed economies – we focus on the qualitative and quantitative aspects of possible potential product decline/slowdown
Concerning the Czech labour market data, we could probably stress a couple of relatively important observations: given the gravity of the financial and economic crisis, long-term unemployment increased by approximately 2 percentage points over the period 2009-2010
Summary
Economic science is incessantly witnessing controversy about how to define potential output, with some economists stating it is completely impossible, and others essentially claiming it is relatively simple and straightforward. For the sake of simplicity, we tend to use the New Keynesian (i.e., more or less mainstream) definition of potential output and business cycle, generally arguing it is an output with a “stable” inflation This approach is put forward in its certain form by institutions such as the International Monetary Fund, the World Bank, and the European Commission.. Since the crisis is still somewhat present in the economy – mainly in the form of anaemic output growth and higher rates of unemployment in a number of developed economies – we focus on the qualitative (i.e., explicatory reasons) and quantitative (in terms of potential GDP losses in the Czech Republic) aspects of possible potential product (growth) decline/slowdown To answer such questions we need to estimate potential GDP itself. In the final part, we present results focusing on the Czech labour market, including helpful findings for the dynamized gap version of Okun’s law
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