MEASUREMENT OF POTENTIAL OUTPUT FOR TURKEY:
UNOBSERVED COMPONENTS MODEL

Dilara ECE (Central Bank of the Republic of Turkey)
Fethi ÖĞÜNÇ (Central Bank of the Republic of Turkey)

This paper specifies a basic univariate and an extended model to estimate potential output using information from observable aggregates and presents results for the Turkish economy. The most important motivation behind measuring output gap for the Turkish economy is the lack of a certain measure for the output gap that gains significance for both the near-term and long-term inflation forecasts especially within the "inflation-targeting framework". The first specification used in the paper, i.e. univariate approach decomposes actual output into potential output that follows a random walk with a time-varying potential growth rate and a stationary output gap. The univariate specifications commonly ignore some economic content, which might be significant for the measurement of output gap. In this respect, an extended approach is utilized to build a relationship between inflation and the level of the output gap.