1. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group MEASURING OUTPUT GAP IN LITHUANIA 1997–2007 Jurga Rukšėnaitė Chief Specialist, Methodology and Quality Division

2. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group  The OBJECT of the research is the measurement of Lithuania’s output gap by different statistical methods: univariate and multivariate.  Results are compared identifying differences and similarities between mentioned models.

3. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Output gap The level of the output that is at any time consistent with stable inflation – Potential Output. - output gap - actual output - potential output

4. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Output gap and inflation ↑ inflation ↓ inflation

5. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Categories of methods:  univariate methods (methods that use information inherent in GDP only)  multivariate methods (methods that also use additional variables)

6. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Univariate methods  Time trend  Hodrick-Prescott filter  Unobserved components method Strict assumption: Trend – potential output.

7. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Time trend - trend - cyclical component + Short period - No changes in economic structure

8. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Hodrick-Prescott filter - trend smoothness + Influenced by shocks - Stable economic environment

9. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Unobserved components method - trend - cycle - irregular component + Trend and cyclical component are estimated simultaneously - Other time series that reflect the economy

10. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Multivariate model (1)  Cobb-Douglas function Y(t) – output, A(t) – total factor productivity, K(t) – capital stock at constant prices, L(t) – labour, – elasticity of production function.

11. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Multivariate model (2)  First assumption: Potential level of employed persons is equal to the actual level but filtered with HP filter.  Second assumption: The actual capital stocks are close to potential capital stocks.  Two models have been chosen: First model (CD1): Total factor productivity has been evaluated using labour productivity as time function. Second model (CD2): Total productivity has been chosen as a constant.

12. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group  Source: Database of Indicators of Statistics Lithuania  Statistical data: Lithuania’s macroeconomic and social statistics data  Frequency: Quarterly data, period 1997–2007

13. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Pre-adjustment  Analysis of economical situation  Analysis of outliers  Seasonally and working-day adjustment Annual data of capital stocks have been decomposed into quarterly data using capital formation data.

14. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Univariate methods Time trend model (LTL million) UCM (LTL million) HP filter model (LTL million) Output gaps. (Per cent of potential GDP)

15. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Results of univariate methods  Time trend model  HP filter  UCM

16. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Multivariate methods Model CD1 (LTL million)Model CD2 (LTL million) Output gaps by CD1 and CD2 models. (Per cent of potential GDP)

17. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Results of multivariate methods  CD1  CD2

18. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Quantity statistics Statistics of output gap (per cent of potential GDP) MethodCD1CD2 Average0.030.14 Standard deviation2.565.21 Lowest value-7.1-12.7 Highest value5.47.4 Multivariate methods MethodTime trendHP filterUCM Average-0.200.01-0.06 Standard deviation6.042.432.56 Lowest value-12.1-5.1-4.8 Highest value8.24.74.8 Univariate methods

19. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Conclusions  Results of univariate and multivariate methods have been compared.  Smoothening methods are appropriate for general analysis.  The results showed that univariate methods – Hodrick-Prescott method and Unobserved components method – are statistically similar.  The time trend method and Cobb-Douglas function (with total productivity chosen as a constant) showed some similarities in economy 1998–2002.  Univariate and multivariate methods should be combined for making decisions on the country’s economic situation.

20. www.stat.gov.lt 5 12 2008 Euro-Indicators Working Group Questions are welcome