Trend GDP Growth Research Articles

The macro determinants of the drop in Pakistan’s long run GDP growth

This paper attempts to address the long-run determinants of trend GDP growth in Pakistan for years 1973 till 2017. The theoretical framework chosen has been the Keynesian general equilibrium framework of aggregate demand, decomposed into the macro aggregates of consumption, investment, government expenditures, exports and imports (Keynes, 1937). The analytical strategy we have used is to establish first whether there has been a discrete drop in GDP growth at any particular break date. Establishing a break date allows us to define two periods of GDP growth, a higher growth period, followed by a lower growth period. The determinants of GDP growth can then be established, by looking for correlated changes in their behavior between the two time periods. Our findings suggest that high GDP growth in the first phase, pre-1992, is explained by high investment growth. Paired with a Marginal Propensity to Consume in this phase which is low. Making this high GDP growth phase investment led. Low GDP growth in the second phase, post-1992, is now explained by low investment growth. Paired with a Marginal Propensity to Consume, in this phase which is higher. Making this phase consumption-led.

Aggregate Implications of Changing Sectoral Trends

We find disparate trend variation in TFP and labor growth across major U.S. production sectors over the post-WWII period. When aggregated, these sector-specific trends imply secular declines in the growth rate of aggregate labor and TFP. We embed this sectoral trend variation into a dynamic multi-sector framework in which materials and capital used in each sector are produced by other sectors. The presence of capital induces important network effects from production linkages that amplify the consequences of changing sectoral trends on GDP growth. Thus, in some sectors, changes in TFP and labor growth lead to changes in GDP growth that may be as large as three times these sectors' share in the economy. We find that trend GDP growth has declined by more than 2 percentage points since 1950, and that this decline has been primarily shaped by sector-specific rather than aggregate factors. Sustained contractions in growth specific to Construction, Nondurable Goods, and Professional and Business and Services make up close to sixty percent of the estimated trend decrease in GDP growth. In addition, the slow process of capital accumulation means that structural changes have endogenously persistent effects. We estimate that trend GDP growth will continue to decline for the next 10 years absent persistent increases in TFP and labor growth.

Aggregate Implications of Changing Sectoral Trends

We find disparate trend variations in TFP and labor growth across major U.S. production sectors and study their implications for the post-war secular decline in GDP growth. We describe how capital accumulation and the network structure of U.S. production interact to amplify the effects of sectoral trend growth rates in TFP and labor on trend GDP growth. We derive expressions that conveniently summarize this long-run amplification effect by way of sectoral multipliers. These multipliers are quantitatively large and for some sectors exceed three times their value added shares. We estimate that sector-specific factors have historically accounted for approximately 3/4 of long-run changes in GDP growth, leaving common or aggregate factors to explain only 1/4 of those changes. Trend GDP growth fell by nearly 3 percentage points over the post-war period with the Construction sector alone contributing roughly 1 percentage point of that decline between 1950 and 1980. Idiosyncratic changes to trend growth in the Durable Goods sector then contributed an almost 2 percentage point decline in trend GDP growth between 2000 and 2018. Remarkably, no sector has contributed any steady significant increase to the trend growth rate of GDP in the past 70 years.

Macroeconomic stability and economic growth: Myths and realities

In this paper, we explore empirical relationships between sustained GDP growth and macroeconomic volatility, using World Economic Outlook data for the period 1980–2015, both in descriptive statistics and in fixed-effect panel regressions (IMF, 2016). The results debunk certain myths, such as those that maintain that more inflation generates more growth, that stabilization carries real costs, or that large inflows of foreign capital stimulate growth. We show that inflation has a tangible negative impact on growth and that there are “inflation thresholds”, beyond which that impact increases. Higher inflation is associated with greater nominal and real volatility, defined as cyclical output volatility. Furthermore, current account volatility contributes significantly to real volatility. Lastly, we show that real volatility has a negative impact on trend GDP growth and that macroeconomic volatility does not contribute to growth or well-being.

Measuring the natural rate of interest: International trends and determinants

U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach–Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there into 2016. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach–Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

Measuring the Natural Rate of Interest: International Trends and Determinants

U.S. estimates of the natural rate of interest?the real short-term interest rate that would prevail absent transitory disturbances?have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies?Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

The Equilibrium Real Funds Rate: Past, Present, and Future

We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, interpreted as the long run or steady state value of the real funds rate. We draw three main conclusions. First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Our narrative and econometric analysis using cross-country data and going back to the 19th century supports a wide range of plausible estimates for the current level of the equilibrium rate, from a little over 0 per cent to the pre-crisis consensus of 2 per cent. Second, a bivariate vector error correction model that looks only to U.S. and world real rates well captures the behavior of U.S. real rates. The model treats real rates as cointegrated unit root processes. As of the end of our sample (2014), the model forecasts the real rate in the U.S. will asymptote to an equilibrium value of a little less than half a percent by 2021. Consistent with our first point, however, confidence intervals around this point estimate are huge. Third, the uncertainty around the equilibrium rate argues for more “inertial” monetary policy than implied by standard versions of the Taylor rule. Our simulations using the Fed staff’s FRB/US model show that explicit recognition of this uncertainty results in a later but steeper normalization path for the funds rate compared with the median “dot” in the FOMC’s Summary of Economic Projections.

Measuring the Natural Rate of Interest: International Trends and Determinants

U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.

A Note on Forecasting Treasury Returns with GDP

Cieslak and Povala (2011) discovered that conditioning levels of interest rates on trend inflation helps to forecast bond returns. This note explores that theme using other measures of trend including trend GDP growth. I find that a model free de-trending of rates by trend GDP performs as well or better out of sample as the Cieslak and Povala return predicting factor. This is a result predicted by the classic fisher hypothesis.

Growth and life satisfaction in the Euro zone

Recent studies indicate a paradox: rising income has not led to increases in long-term levels of life satisfaction. Therefore, the hypothesis that citizens adapt to the growth of GDP is tested. This paper analyses empirically the relationship between a deviation in the trend of seasonally adjusted GDP growth and life satisfaction in Euro zone member countries based on data from the European Commission’s Eurobarometer report. This approach is new to the literature and it enables us to detect medium-term adaptation effects on growth rates. This adds a new way of tackling the question of why economic prosperity has had little or no influence on life satisfaction levels.We found that country-wide differences in the relationship of trend GDP growth and life satisfaction exist. Portugal, Italy, Greece, and Spain showed a significantly positive relationship. For other euro member countries, the hypothesis does not hold. This suggests that two different groups exist and if everything else is held constant, economic growth strategies should vary.

Canada's Potential Growth: Another Victim of the Crisis

This study investigates the impact of the current financial crisis on Canada's potential GDP growth. Using a simple accounting framework to decompose trend GDP growth into changes in capital, labor services and total factor productivity, we find a sizeable drop in Canadian potential growth in the short term. The estimated decline of about 1 percentage point originates from a sharply decelerating capital stock accumulation (as investment has dropped steeply) and a rising long-term unemployment rate (which would raise equilibrium unemployment rates). However, over the medium term, we expect Canada's potential GDP growth to gradually rise to around 2 percent, below the pre-crisis growth rate, mostly reflecting the effects of population aging and a secular decline in average working hours.

Canada's Potential Growth: Another Victim of the Crisis?

This study investigates the impact of the current financial crisis on Canada's potential GDP growth. Using a simple accounting framework to decompose trend GDP growth into changes in capital, labor services and total factor productivity, we find a sizeable drop in Canadian potential growth in the short term. The estimated decline of about 1 percentage point originates from a sharply decelerating capital stock accumulation (as investment has dropped steeply) and a rising long-term unemployment rate (which would raise equilibrium unemployment rates). However, over the medium term, we expect Canada's potential GDP growth to gradually rise to around 2 percent, below the pre-crisis growth rate, mostly reflecting the effects of population aging and a secular decline in average working hours.

Optimal Emerging Market Fiscal Policy when Trend Output Growth is Unobserved

This paper is concerned with how fiscal policy in emerging markets should respond to economic fluctuations. We model the behaviour of a fiscal authority in an emerging market country who can use external borrowing to smooth the effects of exogenous output shocks on domestic agents' private consumption. We focus on the policy implications of the facts that (1) the GDP process in emerging markets is characterised by a relatively volatile trend growth rate, and (2) that policymakers cannot directly observe the output gap or the trend GDP growth rate. We have two key findings. First, we find that risk-averse policymakers who face EME-style output processes (ie processes dominated by shocks to the trend growth rate) should run tighter fiscal policies, with lower average debt-GDP ratios, than those in industrialised countries, who face different output processes. Second, our baseline parameterisation suggests that EME policymakers should run countercyclical fiscal policies. This result contrasts with other papers which have used optimising frameworks and the features of EME output processes to rationalise the observed procyclicality of EME fiscal policies or external balances. Simulations suggest that the welfare costs of naively running a fiscal policy that would be appropriate for an industrialised country are around 1% of certainty-equivalent consumption, but this result is sensitive to parameterisation. We find that a simple rule-of-thumb policy that stabilises the debt-GDP ratio in every period entails much smaller welfare losses.

Prudence and UK Trend Growth

Trend GDP growth has assumed an importance in the public debate not least because the decomposition of GDP into trend and cyclical components lies at the heart of the 'Golden Rule'. This rule states that the Government should only borrow to invest over the economic cycle. Furthermore, over the medium term the public finances are projected using Treasury estimates of trend GDP growth. Trend growth estimates are therefore central to discussions about the sustainability of the public finances (see HM Treasury, 1999a).

Potential Output and Total Factor Productivity Growth in Post-Apartheid South Africa

This paper provides estimates of potential output growth in post-apartheid South Africa using both time trend techniques and a production function approach which indicates a potential growth rate of around 3 percent. The implied output gap provides statistically significant information for predicting inflation and could thus provide valuable input for formulating macroeconomic policy. Growth accounting and regression analysis suggest that an increase in trend GDP growth after the end of apartheid in 1994 is attributable to higher TFP growth driven by trade liberalization and greater private sector participation.

Potential Output and total Factor Productivity Growth in Post-Apartheid South Africa

This paper provides estimates of potential output growth in post-apartheid South Africa using both time trend techniques and a production function approach which indicates a potential growth rate of around 3 percent. The implied output gap provides statistically significant information for predicting inflation and could thus provide valuable input for formulating macroeconomic policy. Growth accounting and regression analysis suggest that an increase in trend GDP growth after the end of apartheid in 1994 is attributable to higher TFP growth driven by trade liberalization and greater private sector participation.

Comment on “Costs of banking system instability: Some empirical evidence”

We have become accustomed to thinking that it is poor countries that suffer most from banking crises. This view is challenged by Glenn Hoggarth, Ricardo Reis and Victoria Saporta (HRS), who focus on the output loss caused by banking crises. There are several new things in this paper. First, new estimates of output losses during 42 banking crises around the world. Second, analysis of these estimates suggesting inter alia that rich countries may actually do worse out of banking crises on average than poor countries, at least when ‘‘doing worse’’ is measured by the new measure of output losses. Obviously this begs the tough question how much of output fluctuations are explainable by banking crises, and (thirdly) the authors present a brave attempt to quantify this too. Let me take these three points one by one. Pointing out the weaknesses of one standard approach to measuring output losses (the so-called IMF 1998 approach, which sums the annual gap between actual and trend GDP growth rates for the period until the growth rate returns to its previous average), the authors argue that it is desirable not to take ‘‘bygones as bygones’’ but to cumulate the total shortfall of the level of output below the previous trend path of output itself, not just of its rate of growth. The new measure (GAP2) is only weakly correlated with the old (the correlation coefficient being just 0.33), and insignificantly so with fiscal costs, so we are definitely dealing with a new animal here (see Fig. 1). Still, we need to treat it with caution when we see some of the numbers the method turns up. For developing countries the measured range is very wide indeed: from 47% in Ghana (output growth accelerated there while they were addressing the banking problems) to þ112% of GDP during the 1980s in the Philippines. It is instructive Journal of Banking & Finance 26 (2002) 857–860

Computers and growth with frictions: aggregate and disaggregate evidence

Not long ago, discussions of the computer revolution by economists centered on the disappointing payoff computers seemed to be having on aggregate, industry, or firm-level movements in productivity, but this disappointed has passed and the business pages are filled with stories heralding the arrival of the “new economy”. This paper investigates the role of computers, software, and communications equipment in the recent surge in U.S. productivity growth in a neoclassical model of investment and production in an attempt to clarify the potential importance of frictions in the transition to a more computer-intensive mode of production on the productivity effects of high-tech equipment. The estimated response of investment in high-tech equipment to its relative price is substantial and sluggish. The high-price elasticity of high-tech capital implies, in conjunction with reasonable assumptions about future declines in high-tech equipment prices and multifactor productivity throughout the economy, that trend GDP growth over 2001–2005 is likely to range between 3 percent and 3-34 percent. The estimated investment frictions are suggestive of complicated dynamics in the short-run impact of high-tech investment on productivity; firm-level evidence suggests such short-run effects may be important, as do the large costs of training workers and installing high-tech capital.