The Norwegian Output Gap During Covid-19
Master thesis
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Date
2023Metadata
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- Master of Science [1800]
Abstract
This thesis focuses on different economic measures of the output gap and potential output in Norway during the pandemic years, where we utilize various univariate and multivariate methods for output gap estimation on real data for the Norwegian economy and simulated data from a simple New Keynesian model. Our results find that the various methods provide very similar results of the output gap on real data, where all methods show a strongly negative output gap during the pandemic years. Furthermore, we discuss whether the various output gap estimation methods provide adequate estimates in the presence of demand and productivity shocks according to New Keynesian theory. We find that one of the multivariate unobserved component models provides significantly better results on the output gap than the univariate unobserved component model, as the latter provides insufficient estimates of the output gap in the presence of both productivity and demand shocks. In the case of productivity shocks, the multivariate unobserved component model that takes into account both actual output and inflation estimates the output gap somewhat similar to the New Keynesian output gap but tends to misinterpret the productivity shocks´ effects on the output gap throughout the majority of the estimation sample. Our results lead us to believe that the output gap estimation methods presented by Furlanetto et al. (2023) misinterpret the effect of large and sudden productivity shocks. Therefore, we believe that these estimation methods are problematic in the presence of supply-side shocks and are not sufficient when estimating the output gap during the pandemic, as it does not take into account the degree of the sudden reduction in potential output due to social and economic shutdowns.
Description
Masteroppgave(MSc) in Master of Science in Business, Economics - Handelshøyskolen BI, 2023