Estimating Output Gap for Pakistan Economy:Structural and Statistical Approaches

The objective of this study is to estimate potential output vis-à-vis output gap for Pakistan’s economy. This paper reviews six commonly used techniques to estimate potential output and from that the output gap. The results suggest that while measures of output gap are not identical they nonetheless do show some degree of association among each other. Therefore, a composite output gap is calculated for 1950 to 2007. The composite output gap depicts that Pakistan economy has been observing a cyclical episode of periods of excess supply followed by excess demand in the period of analysis. Furthermore, evidence suggests that Pakistan economy is currently experiencing rising demand pressures since FY05. These demand pressures show a high degree of correlation with the rising inflation as shown in the temporal correlation between inflation and composite of output gap measures.