Supply-Side Performance in the Czech Republic: A Macroeconomic View (1995-2005)

In this paper, we apply the aggregate production function to approximate the path of potential output and decompose it into its determinants. Based on the decomposition we evaluate the supply side performance from a macroeconomic perspective. We use a time-varying NAIRU to derive the amount of potential labour and a newly developed measure of capital services to account for the productive impact of capital. In addition, trend total factor productivity is estimated. During 1995-2000, the growth in potential output was constrained by a gradual increase in the NAIRU, a temporary drop in investment activity and, most importantly, by only a modest rise in total factor productivity. For the period 2001-2005, we observe substantial improvements in the supply-side performance, except for the functioning of the labour market.