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The interplay of supply and demand shocks: measuring potential output in the COVID-19 pandemic*
Ozana Nadoveza Jelić**
Ozana Nadoveza Jelić
Affiliation: Croatian National Bank, Zagreb, Croatia; University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia
 0000-0002-3651-7795
Nina Pavić** 
Article | Year: 2021 | Pages: 459 - 493 | Volume: 45 | Issue: 4 Received: September 18, 2021 | Accepted: September 22, 2021 | Published online: December 6, 2021
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FULL ARTICLE
FIGURES & DATA
REFERENCES
CROSSMARK POLICY
METRICS
LICENCING
PDF
Source: Authors’ calculations.
Source: Authors’ calculations.
Source: Authors’ calculations.
Note: The letter D denotes a demand shock and the letter S a supply shock. Source: Author’s calculations.
Note: The output gap is expressed as a share of potential GDP, and the capital utilization rate as a share of total production capacity of the manufacturing industry. Source: European Commission (2020); authors’ calculations.
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Variable
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Source
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CPI
inflation forecasts
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Unpublished
and published (Macroeconomic Developments and Outlook) CNB's forecasts
|
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GDP
forecasts
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Unpublished
and published (Macroeconomic Developments and Outlook) CNB's forecasts
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Real
GDP
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Eurostat
(2015=100)
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CPI
inflation
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Croatian
Bureau of Statistics
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Unemployment
rate
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Croatian
Bureau of Statistics (Labour Force Survey)
|
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Variable
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Source
|
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Real
GDP
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Croatian
Bureau of Statistics, CNB's forecasts
|
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CPI
excl. food and energy
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Croatian
Bureau of Statistics, CNB's forecasts
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Compensation
per employee
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Eurostat,
CNB's forecasts
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Unemployment
rate
|
Croatian
Bureau of Statistics (Labour Force Survey), CNB's forecasts
|
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Total
employment
|
Croatian
Bureau of Statistics (Labour Force Survey), CNB's forecasts
|
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Average
hours worked
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JOPDD,
CNB's forecasts
|
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Long-term
unemployment rate
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Eurostat,
CNB's forecasts
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Capital
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Author's
calculations using PIM method (perpetual inventory method)
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Working
age population
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Croatian
Bureau of Statistics – forecast of the working age population 15-74, CNB's
forecasts
|
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CNB
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European Commission
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Total
factor productivity
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In
the medium term, the average growth rate from the period before the COVID-19
crisis is 1% (excluding 2009 when the decline was extremely large and
amounted to about -8%)
|
In
the medium term, we do not know what the projection is based on, because the
average TFP rate in the whole period is around 1%, and the current long-term
projection is 0.4%.
|
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Investments
|
In
the medium term, investment growth of 5.5% is assumed
|
Calculated
from the investment / output ratio, investment growth rates towards the end
of the projection period are negative
|
|
Working
age population
|
CBS
- projection of working age population 15-74 (medium fertility variant with
medium migration)
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Eurostat
– projection of working age population 15-74
|
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Total
employment
|
CBS
(LFS) and the CNB projection, which suggests an increase in the number of
employees in the projection period.
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National
Accounts; in the projection period, they suggest a milder increase in the
number of employees than the CNB in 2021 and 2022, and a decrease in the
number of employees in 2023.
|
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Unemployment
rate
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CBS
(LFS) and the CNB projection, which suggests a decrease in the unemployment
rate in the projection period.
|
In
the projection period, the unemployment rate is assumed to fall in relation
to HNB projection
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Average
hours worked
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A
decrease in working hours (JOPDD) is assumed.
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Source
unknown. In 2020, potential working hours are higher than in 2019. In the
long run, EC forecasts slight growth.
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Sources: European Commission, authors’ calculations.
Sources: European Commission, authors’ calculations.
Note: The revision of the potential GDP growth rate in 2016 on the right chart follows from the revisions of data related to the labour market and is not a consequence of the problems related to the estimation of potential GDP in the context of the corona crisis. Sources: European Commission, authors’ calculations.
Sources: European Commission, authors’ calculations.
Alichi, A. [et al.], 2015. Multivariate Filter Estimation of Potential Output for the Euro Area and the United States. IMF Working Paper, No. 15/253.
Beveridge, S. and Nelson, C., 1981. A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the 'business cycle'. Journal of Monetary Economics, 7(2), pp. 151-174 [ CrossRef]
Burns, A. F. and Mitchell, W. C., 1946. Measuring Business Cycles. Studies in business cycles. Cambridge, MA: NBER.
Fellner, W., 1956. Trends and cycles in economic activity. New York: Henry Holt.
Fontanari, C., Palumbo, A. and Salvatori, C., 2020. Potential Output in Theory and Practice: A Revision and Update of Okun's Original Method. Structural Change and Economic Dynamics, 54, pp. 247-266 [ CrossRef]
Friedman, M., 1957. A theory of the consumption function. Princeton: Princeton University Press.
Hodrick, R. J. and Prescott, E., 1997. Postwar business cycles: an empirical investigation. Journal of Money, Credit, and Banking, pp. 1-16 [ CrossRef]
Jovičić, G. and Kunovac, D., 2017. What is Driving Inflation and GDP in a Small European Economy: The Case of Croatia. CNB Working Papers, W-49.
Koopmans, T. C., 1947. Measurement Without Theory. The Review of Economics and Statistics, 29(3), pp. 161-172 [ CrossRef]
Kydland, F. E. and Prescott, E. C., 1982. Time to Build and Aggregate Fluctuations. Econometrica: Journal of the Econometric Society, 50(6), pp. 1345-1370 [ CrossRef]
Mintz, I., 1969. Dating postwar business cycles. New York: NBER.
Mintz, I., 1972. Dating American growth cycles. In: V. Zarnowitz. The Business Cycle Today, New York: NBER, pp. 39-88.
Nadoveza Jelić, O. and Ravnik, R., 2021. Introducing Policy Analysis Croatian MAcroecoNometric Model (PACMAN). CNB Survey, S-41.
Nelson, C. R., 2008. The Beveridge–Nelson decomposition in retrospect and prospect. Journal of Econometrics, 146(2), pp. 202-206 [ CrossRef]
Solow, R. M., 1956. A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70(1), pp. 65-94 [ CrossRef]
Tóth, M., 2021. A Multivariate Unobserved Components Model to Estimate Potential Output in the Euro Area: A Production Function Based Approach. ECB Working Paper, No. 2523.
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December, 2021
IV/2021
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