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Estimating potential output: a semi-structural approach

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As part of the new macroeconomic modelling project at the Reserve Bank of New Zealand, considerable effort has been directed towards constructing an historical estimate of the productive capacity of the New Zealand economy. The technique documented in this paper augments the stochastic-trend estimation approach of the Hodrick-Prescott (1997) filter with information from broad macroeconomic relationships. This strategy is designed to improve the accuracy with which the filter identifies supply (trend) and demand (cyclical) disturbances in New Zealand real output data. The evolution of inflation over the historical period is now more highly correlated with the estimated demand cycles. Further, the conditioning information improves the updating properties of the estimation technique, relative to the Hodrick-Prescott filter.

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  • Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:1997/09
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