Estimation of Output Gap for Pakistan

A comprehensive exercise is conducted for the estimation of potential output and output gap for Pakistan while considering shortcomings of existing relevant literature. A number of approaches, combining both state-space and structural estimation have been employed for this purpose. These include Bayesian inference, multivariate filter method, vector auto regression (with identification restrictions), state-space model and univariate filtering for estimation of output gap and potential output. The study finds fall in potential output growth of Pakistan during FY09 – FY13, has increased the economy’s vulnerability by making it more susceptible to demand shocks. Forecast of output gap on quarterly and annual frequencies for FY17 is also presented portraying upbeat aggregate demand going forward.