Output gap and beyond

Dünya Executive - - DATA -

►The Hodrick-Prescott (HP) filter is probably the simplest and the most uniformly used statistcal device. It may have an arbitrary component, it also might introduce a spurious cycle in a time series w th typical spectrum. Hamilton’s method s also un variate but it induces reg me-shifts in that it is a Markovswit­ching model.

►If we look at these two, and match loan and depos t growth data w th the output gaps generated by those approaches, we may see that they are s m lar n shape. Because growth cycles are nduced by loan growth patterns, th s s normal.

►They suggest that the Turk sh economy grew n Q4 2017 by 2.24 (HP) and 2 percentage po nts (Ham lton) above ts potent al. Both approaches suggest the potent al growth rate s sl ghtly above 5 percent. Hence, the overheat ng debate.

► Potential output can be defined in myriad ways. It can be seen as the trend of the actual GDP ser es. It can also be seen as the susta nable growth rate cons stent w th non-accelerat ng nflat on. Aga n, t could be the full capac ty output growth rate, .e. growth that can be ach eved f all productive nputs can be used. Lastly, it is a flex-price natural output growth rate.

► Accord ngly, there are un var ate or mult var ate f lter ng techn ques and econom c theory-based approaches to the measuremen­t of potent al output and therefore the output gap.

► We ord nar ly focus on the s mplest techn ques because they are the least t me consum ng computat onal dev ces ava lable. They may not be the soundest tools we possess, theoret cally speak ng, but they are generally useful as short-cuts.

►The d fference s that HP suggests the above potent al growth has started n Q2 2017 whereas Ham lton f nds t a recent phenomenon. If we bel eve the HP f lter, the overheat ng debate has b te at least for the good part of 2017 and poss bly for Q1 2018 – we shall see.

►However, as pr vate banks’ current loan growth s ncompat ble w th above 5 percent GDP growth – pr vate banks’ FX-adjusted loan growth rate stands at 10.2 percent whereas publ c banks’ lend ng grows at a rate of 29.1 percent - and as publ c banks’ current stand s unsusta nable, the economy w ll probably exper ence a reg mesw tch and the fall out may turn out to be below potent al growth th s year. If not, the 2019 adjustment w ll be a lot steeper.

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