Philippine Standard time

Review of the Potential Output and Output Gap Estimation Models of the Bangko Sentral ng Pilipinas

Reliable estimates of the economy’s potential output and output gap are particularly important for inflation targeting and monetary policy setting in the Philippines. This paper examines alternative modeling approaches that can be used to estimate potential output and the output gap in the Philippines. These modeling approaches are the result of the review by the Bangko Sentral ng Pilipinas (BSP) to strengthen the structural framework and time dynamics of the models currently utilized, to capture the impact of labor market dynamics and financial cycle developments in the Philippines, and to enhance the inflation forecasting process through improved estimates of the output gap. Variations of statistically-based filtering methods, production function approach and broad-based macroeconomic modeling approach are used to generate estimates of potential output for the Philippines. A contribution of this study in the empirical literature in the Philippines is the introduction of more comprehensive labor market and financial market conditions indices as explicit drivers of potential output. Given competing models for estimating the output gap, the paper also investigates alternative ways of combining the estimates. The study also looks into the measurement of total factor productivity in the Philippines using production functions.


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