Modern Approaches to Estimating the Regional Output Gap

The concept of potential output assists the Central Bank in managing aggregate demand through the regulation of the money supply. Potential output reflects the level of production consistent with a long-run sustainable equilibrium in the economy. This paper investigates the concept of potential output and the output gap, focusing on the Central Federal District of Russia. It considers an unobserved components model (UCM) built around the Cobb - Douglas production function. In our analysis, we incorporate Phillips curves for prices and wages, as well as Okun's Law, to improve the accuracy of cyclical variable estimations. We construct an unobserved components model to obtain estimates of potential output. The study includes a statistical assessment of the Central Federal District's potential output using the Hodrick - Prescott (HP) filter and an evaluation of the output gap and potential output of the Central Federal District using the unobserved components model. We find that regional output gap estimations can be performed using models that do not account for interregional interactions, while yielding results similar to more complex models. Unobserved components models and the Hodrick - Prescott filter are effective for analyzing potential output. However, potential output estimates, even in semi-structural models, are often revised, the inherent uncertainty in such calculations.

output gap, potential output, Cobb - Douglas production function, unobserved components model, Kalman filter, factor analysis