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The Most Appropriate Model To Estimate Lithuanian Business Cycle

In: Computer Aided Methods In Optimal Design And Operations

Author

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  • A. JAKAITIENĖ

    (Mathematical Statistics Department, Vilnius Gediminas Technical University, Sauletekio 11, 10223 Vilnius, Lithuania and Macroeconomics and Forecasting Division, Bank of Lithuania, Gedimino 6, 01103 Vilnius, Lithuania)

Abstract

This paper reviews four methods of estimating the output gap in Lithuania, including Hodrick-Prescott (HP) filter, Prior-Consistent (PC) filter, production function model and a multivariate unobserved components models. Latent variables obtained using Kalman filter. All estimates of output gap show that the economy of Lithuania has been above it's potential level at the end of 2004. The Kalman filter output gap was less volatile, compare to other methods and only from smooth results of Kalman filter it was possible to identify Lithuanian economy business cycle. A long-run potential growth of the Lithuanian economy is estimated at 5.75 per cent. We could not prove that the Kalman filter reduced end-of-sample uncertainty. Kalman filter was always underestimating the output gap, but HP filter tended to overestimate.

Suggested Citation

  • A. Jakaitienė, 2006. "The Most Appropriate Model To Estimate Lithuanian Business Cycle," World Scientific Book Chapters, in: I D L Bogle & J Žilinskas (ed.), Computer Aided Methods In Optimal Design And Operations, chapter 19, pages 177-186, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812772954_0019
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