Steady-state growth

BIS Working Papers  |  No 812  | 
20 September 2019
by Emanuel Kohlscheen and Jouchi Nakajima
PDF full text
(352kb)
  |  20 pages

Focus

The paper presents a new benchmark against which current economic growth rates of different economies can be assessed at any point in time. The measure can be used, for instance, to assess whether there is any risk of overheating or of build-up of excessive slack.

Contribution

The paper computes steady-state economic growth - defined as the rate of growth that the economy would converge to in the absence of any new shocks. We show that current steady- state growth rates can be computed in real time by means of a relatively simple time-varying parameter (TVP) structural vector autoregression model. Our procedure offers a more agnostic estimation of equilibrium growth rates, which is not subject to end-of-sample distortions. Estimates are presented for seven advanced economies and for the euro area.

Findings

The estimates show that the steady state GDP growth rate in the case of the United States declined from just above 3% per year back in the 1990s to 2.4% at present. Results for the other six advanced economies and the euro area indicate that the steady-state growth rate, which is consistent with stable inflation and financial conditions, has been relatively stable since 2010 in most cases despite a recent slowdown in actual GDP growth rates.

Abstract

We compute steady-state economic growth - defined as the rate of growth that the economy would converge to in the absence of new shocks. This rate can be computed in real-time by means of a parsimonious time-varying parameter (TVP) VAR model. Our procedure offers a relatively agnostic estimation of benchmark equilibrium growth rates. Estimates show that the steady-state GDP growth rate in the case of the United States declined from just above 3% per year in the 1990s to 2.4% at present. Results for other six advanced economies and the euro area indicate that the steady-state growth rate, which is consistent with stable inflation and financial conditions, has been relatively stable since 2010 in most cases in spite of a recent slowdown in actual GDP growth rates.

JEL codes: C11, C15, E30, O40

Keywords: economic growth, financial conditions, inflation, monetary policy, potential output, time-varying parameter VAR, trend growth