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.