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Methodology for Estimating Output Gap and Potential Growth Rate: An Update

Author

Listed:
  • Takuji Kawamoto

    (Bank of Japan)

  • Tatsuya Ozaki

    (Bank of Japan)

  • Naoya Kato

    (Bank of Japan)

  • Kohei Maehashi

    (Bank of Japan)

Abstract

This paper explains the new methodology for calculating Japan's output gap and potential growth rate, both of which are regularly estimated and released by the Research and Statistics Department of the Bank of Japan. We have revised the estimation method given: (1) the retroactive revision of Japan's GDP statistics; (2) the newly available capital stock data which is in line with the new 2008SNA guidelines and adjusted for economic depreciation; and (3) recent structural changes in the factor markets for labor and capital that should be reflected in these estimated trends. Specifically, we have changed our estimation methodology in the following three ways: first, we have revised the estimation method of the "labor force participation rate gap," so as to reflect the recent sustained increase in the labor force participation rate starting around 2012 as a structural trend; second, we have revised the estimation method of the "hours worked gap," to identify the persistent decline in working hours over recent years as more of a structural development possibly due to changes in people's working styles; and third, we have revised the method for calculating the manufacturing "utilization gap," in order to reflect the economic depreciation of equipment and structures more appropriately. Taking a look at the revised output gap, we find that the overall picture for most of the recent period remains unchanged. Furthermore, it turns out that the inflation-prediction power of the revised output gap is almost unchanged from the previous version. Meanwhile, the resulting potential growth rate shows a significant upward revision for the last few years, mainly reflecting a rise in the TFP growth rate associated with the revision of the GDP statistics. As a result, the potential growth rate in recent years is estimated to be in the range of 0.5-1.0 percent, which is comparable to that of the first half of the 2000s, prior to the global financial crisis.

Suggested Citation

  • Takuji Kawamoto & Tatsuya Ozaki & Naoya Kato & Kohei Maehashi, 2017. "Methodology for Estimating Output Gap and Potential Growth Rate: An Update," Bank of Japan Research Papers 17-05-31, Bank of Japan.
    • Handle: RePEc:boj:bojron:ron170531a
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    3. Mr. Fei Han, 2019. "Demographics and the Natural Rate of Interest in Japan," IMF Working Papers 2019/031, International Monetary Fund.
    4. Han, Fei, 2024. "The impact of demographic change on the natural rate of interest in Japan," Japan and the World Economy, Elsevier, vol. 69(C).
    5. Makoto Saito, 2021. "Public Bonds as Money Substitutes at Near-Zero Interest Rates: Disequilibrium Analysis of the Current and Future Japanese Economy," Advances in Japanese Business and Economics, in: Strong Money Demand in Financing War and Peace, pages 79-119, Springer.
    6. Mohamed A. M. Sallam & Mohamed R. Neffati, 2019. "Estimation and Analysis of the Output Gap for the Saudi Economy; Econometric Study (1970-2016)," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(2), pages 267-284, February.
    7. Ichiro Fukunaga & Yoshihiko Hogen & Yojiro Ito & Kenji Kanai & Satoshi Tsuchida, 2024. "Potential Growth in Japan: Issues on Its Relationship with Prices and Wages," Bank of Japan Working Paper Series 24-E-16, Bank of Japan.
    8. Felipe, Jesus & Estrada, Gemma, 2020. "What happened to the world's potential growth after the 2008–2009 global financial crisis?," Journal of the Japanese and International Economies, Elsevier, vol. 56(C).
    9. Bianca PĂUNA & George GEORGESCU, 2021. "EU’s CAM and Potential GDP Estimates. Some Inconsistent Results in the Case of Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-16, December.
    10. Sekine, Toshitaka, 2022. "Looking from Gross Domestic Income: Alternative view of Japan’s economy," Japan and the World Economy, Elsevier, vol. 64(C).
    11. Yoshihiko Hogen & Ryoichi Okuma, 2018. "The Anchoring of Inflation Expectations in Japan: A Learning-Approach Perspective," Bank of Japan Working Paper Series 18-E-8, Bank of Japan.
    12. Koeda, Junko, 2019. "Macroeconomic effects of quantitative and qualitative monetary easing measures," Journal of the Japanese and International Economies, Elsevier, vol. 52(C), pages 121-141.
    13. Ichiro Fukunaga & Yoshihiko Hogen & Yoichi Ueno, 2024. "Japan's Economy and Prices over the Past 25 Years: Past Discussions and Recent Issues," Bank of Japan Working Paper Series 24-E-14, Bank of Japan.
    14. Sohei Kaihatsu & Maiko Koga & Tomoya Sakata & Naoko Hara, 2019. "Interaction between Business Cycles and Economic Growth," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 37, pages 99-126, November.
    15. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.
    16. Sohei Kaihatsu & Mitsuru Katagiri & Noriyuki Shiraki, 2023. "Phillips Correlation and Price‐Change Distributions under Declining Trend Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(5), pages 1271-1305, August.
    17. Naohisa Hirakata & Kazutoshi Kan & Akihiro Kanafuji & Yosuke Kido & Yui Kishaba & Tomonori Murakoshi & Takeshi Shinohara, 2019. "The Quarterly Japanese Economic Model (Q-JEM): 2019 version," Bank of Japan Working Paper Series 19-E-7, Bank of Japan.

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    More about this item

    Keywords

    output gap; potential growth rate; GDP; phillips curve;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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