Estimation of Potential Production and Production Gap in Iran’s Economy (Based on Data-Filtering Methodology and Economic Policy Effect Analyzing)

Falahati, Ali; Ahmadi, Marzieh; Allah Rezaee, Asaad; Narimani, Ahmad

Estimation of Potential Production and Production Gap in Iran’s Economy (Based on Data-Filtering Methodology and Economic Policy Effect Analyzing)

Document Type : Review Article

Authors

Ali Falahati

Marzieh Ahmadi

Asaad Allah rezaee

Ahmad Narimani

Abstract

The present article seeks to estimate the potential production and the production gap for the Iranian economy for the time period of 1966-2013. The available approaches for the purpose could be classified as economic (based on production function) and statistical (based on time series) methods. The economic approaches are ignored due to their complexity and unavailability of the required data. From among the statistical methods, the Band-Pass approach is decided to be eliminated as it misses some observations at the extremes of time series. So the remaining two filtering methods of Hodrick- Prescott and Kalman are recognized appropriate for the purpose. The potential production of the Iranian economy is estimated by the H-P and K methods for the time period of 1966-2013. The difference between the estimated potential production and the actual production shows the production gap. The resulted figures demonstrate an irregular trend of production/GDP gap. Also the results clearly reflect the impacts of the major local events such as the Islamic revolution, the imposed (Iran-Iraq) war, the oil shocks and the economic plans.

Keywords

potential production

GDP

Output gap

Hodrick - Prescott method

Subjects