The Utilization-Adjusted Output Gap: Is the Russian Economy Overheating?

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper estimates the output gap in Russia using a utilization-adjusted production function approach, which we argue is preferable to traditional output gap methods. The approach amounts to (1) using available surveys to estimate the "natural rates" of capacity and labor utilization above which inflation begins to accelerate; (2) estimating a production function with utilization-adjusted capital and labor inputs; and (3) defining potential output as the level of output obtained when both capital and labor are at their estimated natural rates. The results suggest that the output gap in Russia was negative between 1999 and 2003, but may have recently become positive, thus contributing to inflationary pressures.

TFP change, output gap and inflation in the Russian Federation (1994–2006)

“…It is thus assumed that the capital stock available is always used at its potential. But the traditional method for estimating the potential output is not appropriate for a transitional economy like Russia's, since it is not adjusted for capital utilization and assumes, artificially, that the output gap has been, on average, zero (see further Oomes & Dynnikova, 2006).…”

“…We restrict ourselves to factor utilization in industry, as data on other sectors is fragmentary. Following Oomes and Dynnikova (2006) we take the capacity utilization (u k ) and NAICU (u * k ) measures estimated for industry as proxies for the economy-wide u k and u * k , respectively. The estimates of u k come from three institutions, namely: the Institute for the Economy in Transition (IET), the Russian Economic Barometer (REB), and the Center for Economic Analysis (CEA).…”

The Russian growth path and TFP changes in light of estimation of the production function using quarterly data

“…Some of the preceding papers, including Oomes and Dynnikova [2006], suggested the importance of utilization rates of primary factor inputs. We also present estimations of a production function using data on capital and labor adjusted for utilization in REB (Russian Economic Barometer) [2010, Vol.…”

“…The literature concerning the Russian production function [de Broeck and Koen, 2000;Wilson and Purushothaman, 2003;Bessonov, 2004;Oomes and Dynnikova, 2006;Izyumov and Vahaly, 2008;Hanson, 2009] contributed to a better understanding of the Russian economic growth (contraction). However, all of them were not so satisfactory at the point that they employed annual data.…”

Measuring the Performance of Fiscal Policy in Russia

“…However, the level and the growth rate of potential output are extremely difficult to estimate, which makes the estimation of fiscally neutral expenditure problematic. Table 6 shows two output gaps: the baseline output gap, which is calculated in Oomes and Dynnikova (2005), and an alternative output gap, which is calculated using two simple hypotheses: potential output grows at 6 percent a year and the output gap is closing in 2005. This alternative measure of output gap, which is quite simplistic, provides a useful benchmark to assess how much the measure of the fiscal stance depends on the calculation of potential output.…”