Estimating Production Gap and NAIRU in Iran's Economy by Using State-Space Model

Authors

1 aFaculty of Economics & Administrative Science, Ferdowsi University of Mashhad, Khorasan-e-razavi, Iran

2 aFaculty of Economics & Administrative Science, Ferdowsi University of Mashhad, Khorasan-e-razavi, Iran.

3 Faculty of Economics, University of Tehran, Tehran, Iran.

4 Faculty of Economics & Administrative Science, Ferdowsi University of Mashhad, Khorasan-e-razavi, Iran.

Abstract

The purpose of this paper is to estimate the output gap and NAIRU for Iran's economy, both of which are among the most important variables in determining the economic status. Since these variables are unobservable, to estimate them, one needs modern econometric techniques rather than conventional tools. For this reason, this paper uses the Kalman filter tool in the form of a state-space model. Since there are several different specifications for a state-space structure, seven different models are tested by using seasonal data from 1989 to 2014. Results show that only two specifications have suitable estimation results. The first one is a structural model consisting of output and unemployment rate decomposition, plus the relationship between the inflation rate and the output gap in the form of the Phillips curve, and the second is a system that only includes unemployment rate decomposition. The early model can show the periods of inflationary recession between 1992 and 1995, and a severe economic recession during the period of 2010–2013 due to economic sanctions imposed on Iran. The latter model can depict NAIRU gap fluctuations following the inflation fluctuations. In addition to the compatibility of these results with what is observed in reality, the parameters are also statistically significant.

Keywords

References

Falahati, A., Ahmadi, M., Rezaei, A., & Narimani, A. (2016). Estimation of Potential Production and Production Gap for Iran, and Reviewing the Policy for the Realization of Continuous Economic Growth (Data Filtering Approach). Strategic and Macro Politics Quarterly, 4(13), 97-113.
Harvey, A. (1989). Forecasting Structural Time Series Models and the Kalman Filter. Cambridge: Cambridge University Press.
Hajir Kiani, K., & Moradi, A. (2012). Estimation of Potential Production and Production Gap with Emphasis on Filtering Approaches Applied to Iran's Economy. Macroeconomics, 7(13), 143-172.
Kavand, H., & Bagheri, F. (2007). Calculation of Real GDP Gap Using a Space-State Model. Science and Development Magazine, 21, 1-20.
Nasrisfahani, R., Akbari, N., & Bidram, R. (2004). Computing the Gap of Seasonal GDP and the Impact of Nominal Factors on It in IRAN: A VAR Approach. Quarterly Journal of Iran Economy Research, 22, 43-68.  
Rajaei, H. A., & Jalaei, A. M. (2017). Study of the Production Gap in Iran's Economy Using the Hodrick-Prescott and Band-Pass Filtering. Economic Magazine, 3(4), 135-150.
Sramkova, L., Kobilicova, M., & Krajcir, Z. (2010). Output Gap and NAIRU Estimates within State – Space Framework: An Application to Slovakia. Financial Policy Institute, The Ministry of Finance of the Slovak Republic, Retrieved from https://www.mfsr.sk/en/
Us, V. (2014). Estimating NAIRU for the Turkish Economy Using Extended Kalman Filter Approach. Central Bank of the Republic of Turkey, Retrieved from https://www.researchgate.net/profile/Vuslat_Us/publication/273452301_Estimating_NAIRU_for_the_Turkish_Economy_Using_Extended_Kalman_Filter_Approach/links/55f0062308aedecb68fddb6a.pdf
Iranian Economic Review
Volume 24, Issue 4
December 2020
Pages 983-998

Files

Share

How to cite

Statistics