Does Using Nairu in the Production Function Influence Estimation of Potential Output and Output Gap?

Abstract

Abstract:Although there are more sophisticated methods of estimation of output gap and potential output, a production function still remains among the most used methods of estimation of these unobservable variables. To gain the most reliable data, several versions of the production function have been developed. This paper analyses if there is some difference between using a version of production with HP filter applied during the estimation and NAIRU. Results will show that there are not very significant differences but because NAIRU can explain changes at the labour market better it will be recommended to use this version of production function.