Potential growth in Central America and the Dominican Republic: Was there a pre-pandemic new normal?
Main Article Content
Keywords
Bayesian model avaraging, output gap, potential growth, production function, regime switching
Abstract
This paper explores the potential growth of Central America and the Dominican Republic after the 2008-2009 crisis to shed light on their 2020 pre-pandemic macroeconomic vulnerability and to ascertain that the observed path is deviating more than before from its potential. Using Hodrick-Prescott filter by constrained minimization, production function, regime-switching models, and Bayesian model averaging, the main findings suggest a pre-pandemic regional slowdown. By country, there are mixed results. This scenario was not only driven by international factors but by particularities; on the one hand, statistical models show higher potential growth, and, in a less favorable context, the region would be closer to the structural performance; on the other hand, individual factors are hindering potential growth.
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References
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Bils, M., & Klenow, P. J. (2000). Does schooling cause growth? American economic review, 90, 1160–1183. Available at: http://dx.doi.org/10.1257/aer.90.5.1160
Caballero, R. J., & Farhi, E. (2018). The safety trap. The Review of Economic Studies, 85, 223–274. Available at: https://doi.org/10.1093/restud/rdx013
Cotis, J.-P., Elmeskov, J., & Mourougane, A. (2004). Estimates of potential output: benefits and pitfalls from a policy perspective. The Euro Area business cycle: stylized facts and measurement issues, Centre for Economic Policy Research, 35–60.
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Di Bucchianico, S. (2020). Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate? Review of Political Economy, 1–24. Available at: https://doi.org/10.1080/09538259.2020.1837546
Domar, E. D. (1946). Capital expansion, rate of growth, and employment. Econometrica, Journal of the Econometric Society, 137–147. Available at: https://doi.org/10.2307/1905364
Eichengreen, B. (2015). Secular stagnation: the long view. American Economic Review, 105, 66–70. Available at: http://dx.doi.org/10.1257/aer.p20151104
Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105, 3150–82. Available at: http://dx.doi.org/10.1257/aer.20130954
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Ferreira, P. C., Pessôa, S. d., & Veloso, F. A. (2012). On the evolution of TFP in Latin America. Fundação Getulio Vargas. Escola de Pós-graduação em Economia. Available at: https://hdl.handle.net/10438/11798
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Guasch, J. L., Rojas-Suárez, L., & Gonzales, V. (2012). Competitiveness in Central America: The Road to Sustained Growth and Poverty Reduction. Center for Global Development Working Paper. Available at: http://dx.doi.org/10.2139/ssrn.2560945
Hamilton, J. D. (1990). Analysis of time series subject to changes in regime. Journal of econometrics, 45, 39–70. Available at: https://doi.org/10.1016/0304-4076(90)90093-9
Hamilton, J. D. (1991). A quasi-Bayesian approach to estimating parameters for mixtures of normal distributions. Journal of Business & Economic Statistics, 9, 27–39. Available at: https://doi.org/10.1080/07350015.1991.10509824
Hansen, A. H. (1934). Capital goods and the restoration of purchasing power. Proceedings of the Academy of Political Science, 16, 11–19. Available at: https://doi.org/10.2307/1172387
Hansen, A. H. (1938). Full recovery or stagnation? Available at: https://doi.org/10.2307/2225186
Harrod, R. F. (1939). An essay in dynamic theory. The Economic Journal, 49, 14–33. Available at: https://doi.org/10.2307/2225181
Hodrick, R., & Prescott, E. (1980). Post-war US business cycles: An Empirical Investigation. Tech. rep., Working Paper, Carnegie Mellon University, 1980. Available at: http://hdl.handle.net/10419/220811
Inchauste, G., Morena, H., & Stein, E. (2009). Hacia la generación de más oportunidades: Fundamentos para una agenda de desarrollo económico y social en El Salvador. Washington, DC: Inter-American Development Bank.
Johnson, M. C. (2013). Potential Output and Output Gap in Central America, Panama and Dominican Republic. International Monetary Fund. Available at: https://doi.org/10.5089/9781484322208.001
Kim, C., & Nelson, C. R. (1999). State-space models with regime switching: Classical and Gibbs-sampling approaches with applications. MIT Press Books, 1.
Krugman, P. (2014). Secular Stagnation: The Book. New York Times, The Opinion Pages.
Lanzafame, M., Felipe, J., Sotocinal, N. R., & Bayudan-Dacuycuy, C. (2016). The Pillars of Potential Growth and the Role of Policy: A Panel Data Approach. Asian Development Bank Economics Working Paper Series. Available at: https://www.adb.org/sites/default/files/publication/184482/ewp-482.pdf
Leamer, E. E., & Heckman, J. J. (2001). Handbook of econometrics. Elsevier/North Holland.
Manzano, O., & Maldonado, L. (2016). Weathering the Storm: Policy Options for Central America and the Dominican Republic in an Uncertain Environment. Washington, DC: Inter-American Development Bank. Available at: https://publications.iadb.org/en/weathering-storm-policy-options-centralamerica-and-dominican-republic-uncertain-environment
Marcet, A., & Ravn, M. O. (2004). The HP-filter in cross-country comparisons. Available at: https://www.barcelonagse.eu/research/working-papers/hp-filter-cross-country-comparisons
Martin, D. (2015). Rekindling Economic Growth in Belize. Washington, DC: Inter-American Development Bank. Available at: https://publications.iadb.org/publications/english/document/Rekindling-Economic-Growth-in-Belize.pdf
Miller, S. (2003). Métodos alternativos para la estimación del PBI potencial: Una aplicación para el caso de Perú. Estudios Económicos, 10, 1–38. Available at: https://www.bcrp.gob.pe/docs/Publicaciones/Revista-Estudios-Economicos/10/Estudios-Economicos-10-3.pdf
Prat, J., & Solera, M. (2017). Running Out of Tailwinds: Opportunities to Foster Inclusive Growth in Central America and the Dominican Republic. Washington, DC: Inter-American Development Bank. Available at: https://publications.iadb.org/publications/english/document/Running-Out-of-Tailwinds-Opportunities-to-Foster-Inclusive-Growth-in-Central-America-and-the-Dominican-Republic.pdf
Quijada, J. A., & Sierra, J. (2014). Productividad total de los factores en Honduras: Diagnóstico y posibles determinantes. Banco Interamericano de Desarrollo. Departamento de paı́ses. Resumen de Polı́ticas IDB-PB-221. Available at: https://publications.iadb.org/publications/spanish/document/Productividad-total-de-los-factores-en-Honduras-Diagnóstico-y-posibles-determinantes.pdf
Sánchez, S. M., Scott, K., & López, J. H. (2016). Guatemala: Closing gaps to generate more inclusive growth. World Bank. Available at: https://doi.org/10.1596/24694
Schipke, A. & Desruelle, D. (2007). América Central: Crecimiento económico e integración. América Latina, 60, 70. Available at: http://dx.doi.org/10.5089/9781589066601.084
Sosa, S., Tsounta, E., & Kim, M. H. (2013). Is the growth momentum in Latin America sustainable? International Monetary Fund. Available at: https://doi.org/10.5089/9781484347928.086.ch003
Summers, L. (2013). Speech at the IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer, November 8. Speech at the IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer, November 8. Available at: https://doi.org/10.1057/imfer.2015.6
Summers, L. (2014). U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound. Business Economics, 49, 65–73. Available at: https://doi.org/10.1057/be.2014.13
Asocio para el Crecimiento. El Salvador - Análisis de Restricciones. (2011). Available at: https://www.bcr.gob.sv/bcrsite/uploaded/content/category/1722471256.pdf
Barbieri, M. M., & Berger, J. O. (2004). Optimal predictive model selection. The annals of statistics, 32(3), 870-897.
Barro, R. J., & Lee, J. W. (2013). A new data set of educational attainment in the world, 1950–2010. Journal of development economics, 104, 184–198. Available at: https://doi.org/10.1016/j.jdeveco.2012.10.001
Bernanke, B. (2015a). Why are interest rates so low, part 2: Secular stagnation. Ben Bernanke’s Blog, 2015. Available at: https://www.brookings.edu/blog/ben-bernanke/2015/03/31/why-are-interest-rates-solow-part-2-secular-stagnation/
Bernanke, B. (2015b). Why are interest rates so low, part 3: The Global Savings Glut. Ben Bernanke’s blog, 1. Available at: https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-solow-part-3-the-global-savings-glut/
Beverinotti, J., Chang, J., Corrales, L. F., & Vargas, T. (2014). Diagnóstico de crecimiento para Costa Rica. Nota Técnica. Available at: https://publications.iadb.org/publications/spanish/document/Diagnóstico-decrecimiento-de-Costa-Rica.pdf
Bils, M., & Klenow, P. J. (2000). Does schooling cause growth? American economic review, 90, 1160–1183. Available at: http://dx.doi.org/10.1257/aer.90.5.1160
Caballero, R. J., & Farhi, E. (2018). The safety trap. The Review of Economic Studies, 85, 223–274. Available at: https://doi.org/10.1093/restud/rdx013
Cotis, J.-P., Elmeskov, J., & Mourougane, A. (2004). Estimates of potential output: benefits and pitfalls from a policy perspective. The Euro Area business cycle: stylized facts and measurement issues, Centre for Economic Policy Research, 35–60.
Davies, G. (2020). The effects of Covid-19 could deepen secular stagnation. Financial Times, 31 May. Available at: https://www.ft.com/content/d60cdc40-9fec-11ea-b65d-489c67b0d85d.
Di Bucchianico, S. (2020). Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate? Review of Political Economy, 1–24. Available at: https://doi.org/10.1080/09538259.2020.1837546
Domar, E. D. (1946). Capital expansion, rate of growth, and employment. Econometrica, Journal of the Econometric Society, 137–147. Available at: https://doi.org/10.2307/1905364
Eichengreen, B. (2015). Secular stagnation: the long view. American Economic Review, 105, 66–70. Available at: http://dx.doi.org/10.1257/aer.p20151104
Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The next generation of the Penn World Table. American Economic Review, 105, 3150–82. Available at: http://dx.doi.org/10.1257/aer.20130954
Fernald, J. G. (2015). Productivity and Potential Output before, during, and after the Great Recession. NBER macroeconomics annual, 29, 1–51. Available at: https://doi.org/10.1086/680580
Fernández-Arias, E. (2014). Productivity and factor accumulation in Latin America and the Caribbean: A database. Washington, DC: Inter-American Development Bank. Available at: https://publications.iadb.org/en/publication/12817/productivity-and-factor-accumulation-latin-america-and-caribbeandatabase
Ferreira, P. C., Pessôa, S. d., & Veloso, F. A. (2012). On the evolution of TFP in Latin America. Fundação Getulio Vargas. Escola de Pós-graduação em Economia. Available at: https://hdl.handle.net/10438/11798
Gordon, R. J. (2015). Secular stagnation: A supply-side view. American Economic Review, 105, 54–59. Available at: http://dx.doi.org/10.1257/aer.p20151102
Guasch, J. L., Rojas-Suárez, L., & Gonzales, V. (2012). Competitiveness in Central America: The Road to Sustained Growth and Poverty Reduction. Center for Global Development Working Paper. Available at: http://dx.doi.org/10.2139/ssrn.2560945
Hamilton, J. D. (1990). Analysis of time series subject to changes in regime. Journal of econometrics, 45, 39–70. Available at: https://doi.org/10.1016/0304-4076(90)90093-9
Hamilton, J. D. (1991). A quasi-Bayesian approach to estimating parameters for mixtures of normal distributions. Journal of Business & Economic Statistics, 9, 27–39. Available at: https://doi.org/10.1080/07350015.1991.10509824
Hansen, A. H. (1934). Capital goods and the restoration of purchasing power. Proceedings of the Academy of Political Science, 16, 11–19. Available at: https://doi.org/10.2307/1172387
Hansen, A. H. (1938). Full recovery or stagnation? Available at: https://doi.org/10.2307/2225186
Harrod, R. F. (1939). An essay in dynamic theory. The Economic Journal, 49, 14–33. Available at: https://doi.org/10.2307/2225181
Hodrick, R., & Prescott, E. (1980). Post-war US business cycles: An Empirical Investigation. Tech. rep., Working Paper, Carnegie Mellon University, 1980. Available at: http://hdl.handle.net/10419/220811
Inchauste, G., Morena, H., & Stein, E. (2009). Hacia la generación de más oportunidades: Fundamentos para una agenda de desarrollo económico y social en El Salvador. Washington, DC: Inter-American Development Bank.
Johnson, M. C. (2013). Potential Output and Output Gap in Central America, Panama and Dominican Republic. International Monetary Fund. Available at: https://doi.org/10.5089/9781484322208.001
Kim, C., & Nelson, C. R. (1999). State-space models with regime switching: Classical and Gibbs-sampling approaches with applications. MIT Press Books, 1.
Krugman, P. (2014). Secular Stagnation: The Book. New York Times, The Opinion Pages.
Lanzafame, M., Felipe, J., Sotocinal, N. R., & Bayudan-Dacuycuy, C. (2016). The Pillars of Potential Growth and the Role of Policy: A Panel Data Approach. Asian Development Bank Economics Working Paper Series. Available at: https://www.adb.org/sites/default/files/publication/184482/ewp-482.pdf
Leamer, E. E., & Heckman, J. J. (2001). Handbook of econometrics. Elsevier/North Holland.
Manzano, O., & Maldonado, L. (2016). Weathering the Storm: Policy Options for Central America and the Dominican Republic in an Uncertain Environment. Washington, DC: Inter-American Development Bank. Available at: https://publications.iadb.org/en/weathering-storm-policy-options-centralamerica-and-dominican-republic-uncertain-environment
Marcet, A., & Ravn, M. O. (2004). The HP-filter in cross-country comparisons. Available at: https://www.barcelonagse.eu/research/working-papers/hp-filter-cross-country-comparisons
Martin, D. (2015). Rekindling Economic Growth in Belize. Washington, DC: Inter-American Development Bank. Available at: https://publications.iadb.org/publications/english/document/Rekindling-Economic-Growth-in-Belize.pdf
Miller, S. (2003). Métodos alternativos para la estimación del PBI potencial: Una aplicación para el caso de Perú. Estudios Económicos, 10, 1–38. Available at: https://www.bcrp.gob.pe/docs/Publicaciones/Revista-Estudios-Economicos/10/Estudios-Economicos-10-3.pdf
Prat, J., & Solera, M. (2017). Running Out of Tailwinds: Opportunities to Foster Inclusive Growth in Central America and the Dominican Republic. Washington, DC: Inter-American Development Bank. Available at: https://publications.iadb.org/publications/english/document/Running-Out-of-Tailwinds-Opportunities-to-Foster-Inclusive-Growth-in-Central-America-and-the-Dominican-Republic.pdf
Quijada, J. A., & Sierra, J. (2014). Productividad total de los factores en Honduras: Diagnóstico y posibles determinantes. Banco Interamericano de Desarrollo. Departamento de paı́ses. Resumen de Polı́ticas IDB-PB-221. Available at: https://publications.iadb.org/publications/spanish/document/Productividad-total-de-los-factores-en-Honduras-Diagnóstico-y-posibles-determinantes.pdf
Sánchez, S. M., Scott, K., & López, J. H. (2016). Guatemala: Closing gaps to generate more inclusive growth. World Bank. Available at: https://doi.org/10.1596/24694
Schipke, A. & Desruelle, D. (2007). América Central: Crecimiento económico e integración. América Latina, 60, 70. Available at: http://dx.doi.org/10.5089/9781589066601.084
Sosa, S., Tsounta, E., & Kim, M. H. (2013). Is the growth momentum in Latin America sustainable? International Monetary Fund. Available at: https://doi.org/10.5089/9781484347928.086.ch003
Summers, L. (2013). Speech at the IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer, November 8. Speech at the IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer, November 8. Available at: https://doi.org/10.1057/imfer.2015.6
Summers, L. (2014). U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound. Business Economics, 49, 65–73. Available at: https://doi.org/10.1057/be.2014.13