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Title: Estimating potential output and output gap for East African countries: An eclectic approach
Authors: Osman, M. 
Issue Date: 2008
Journal: European Journal of Economics, Finance and Administrative Sciences 
Abstract: The potential output and the corresponding output gap are key variables in identifying the scope for sustainable non-inflationary growth and assessment of the stance of macroeconomic policies. In this paper, we estimate the potential output and output gaps of four East African countries; Kenya, Ethiopia, Tanzania and Uganda using different statistical methodologies. These methodologies include the linear method, the Hodrick-Prescott filter, the frequency domain filter, and the unobserved components model. The results from these various methodologies show similar assessments of these variables for all the countries in the study. Particularly, estimations of the output gaps of these economies are generally in agreement about the historical boom bust cycles of these countries, if not its precise level and demonstrate that business cycles of these countries display sharp turning points rather than exhibiting smooth patterns that are typical for the advanced economies. However, it is conventional that any assessment of the inflationary pressures of the economy based on one estimate of the output gap is risky and could lead to policy failure. Therefore, the use of the output gap as an indicator for monetary policy must be based on professional judgment and supplementary or intermediate indicators. © EuroJournals, Inc. 2008.
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