Measuring Output Gap in Latvia

Abstract

Computer graphics by Olafs Muiþnieks have been used on the cover. The source is to be indicated when reproduced. ISBN 9984–676–87–0 The views expressed in this publication are those of the author, senior econometrist of Monetary Policy Department. The paper has been revised and may differ from the Latvian version of this publication. The author assumes responsibility for any errors or omissions. To determine whether economic progress of a country presents a threat to its macroeco-nomic sustainability, the difference between actual and potential output is usually used in the formulation of the economic policy. A number of methodologies, including the time series method, HP filter approach and CD function, have been used in the estimation of potential GDP. Potential production factor values were calculated for the needs of the pro-duction function. The data used in the paper lead to an inference that the economic growth depends on increases in capital stock and technological progress, both contributing to labour productivity and offsetting workforce shrinkages.

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