Abstract
This paper contributes to the literature on growth in Asia in several respects. I provide estimates of potential growth for 21 Asian economies using an aggregate supply model with time-varying parameters and a Kalman filtering methodology. My estimates indicate that the actual growth slowdown experienced by many of these economies in the 2000s is associated with a falling trajectory in potential growth. Relying on Bayesian model averaging, I select robust determinants of potential growth and find that the latter is driven by the technology gap, trade, tertiary education, and institutional quality, as well as by working-age population growth. Effective reforms in these areas can help counterbalance declines in potential growth in Asia. I also investigate the relationship between business cycle features and potential growth, finding that higher volatility in actual growth has significantly negative effects on potential growth. Thus, stabilization policies can have beneficial effects on Asian economies’ long-term growth performance.
Highlights
Many Asian economies have enjoyed a remarkable growth performance over the last 3 decades
Given that actual growth will tend to return to the potential growth rate in the long term, this outcome raises concerns regarding the growth performance of Asian economies in the medium to long term, and reinforces the need to investigate the determinants of potential growth
The results indicate that effective economic policy interventions and, more generally, improvements in institutional quality have the potential to positively affect the trajectory of potential growth, counteracting the effects of the recent slowdown in many Asian economies
Summary
Many Asian economies have enjoyed a remarkable growth performance over the last 3 decades. Given that actual growth will tend to return to the potential growth rate in the long term, this outcome raises concerns regarding the growth performance of Asian economies in the medium to long term, and reinforces the need to investigate the determinants of potential growth To carry out this task, I rely on a larger panel of annual data for 69 advanced and emerging economies over the period 1960–2014. I investigate this hypothesis using two different approaches and find that a higher volatility of actual growth with respect to the potential growth rate has a significantly negative impact on the latter This result suggests that policy measures leading to a more stable macroeconomic and growth environment can have long-lasting positive effects on growth performance.
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