Potential Output and Output Gap in a Period of Economic Crises

Abstract

Potential Output and Output Gap in a Period of Economic CrisesThe article investigates potential output and output gap modelling and estimation in the Czech Republic in the period 1996-2021, including the global recession from 2008 and the recent crisis caused by government measures against the COVID-19 pandemic. The unobserved components (UC) methodology is applied, coefficients are estimated by the maximum likelihood method, unobserved variables are estimated using the Kalman filter. The standard UC model is modified in an original way to nonlinearly describe the hysteresis effect by allowing the output gap to have an asymmetrical influence on potential output. The econometric model verification proved significance of the hysteresis effect and showed a substantial inertia of negative consequences of both crises. Predictions of an impact of the War in Ukraine on the gap were also calculated and the uncertainty associated with these predictions was quantified.