Potential Output during Great Recession and Covid-19 Crisis

ABSTRACT

Potential output is an important economic concept representing the level of economic activity sustainable in the long run. Potential output is traditionally considered to be driven by supply-side factors such as labor supply, capital investments and new technologies. An associated concept of the output gap is usually seen as short-run deviations of actual output from its potential due to demand-side factors. The great recession of 2008 slightly altered this traditional view and suggested that a demand-side factors might also play an important role on potential output. This paper proposes a modelling framework in which short-run demand-driven fluctuations of the output gap might have an important effect on the potential output and its long-run growth. Unobserved components methodology is applied and original nonlinear conditionally Gaussian state space model is formulated and econometrically estimated for the Czech Republic by maximum likelihood methodology for the time period 1996Q1-2021Q4 including great recession of 2008 and recent covid-19 crisis.