Alternative Methods for a Forward-Looking Assessment of Potential GDP Growth

While the methods for assessing potential GDP growth discussed in chapter 5 were characterized by their retrospective nature, we now consider the case where forward-looking information enters the projection as well. In particular, this part of the project investigates whether information contained in the term structure of interest rates may be useful for assessing future economic growth. This part of the project is less concerned with determining potential growth itself (which is inherently unobservable). It is rather aimed at analysing the adequacy of term structurebased methods for forecasting the short- up to medium-term real development. The methodology applied in this chapter is mostly motivated from an empirical perspective and less motivated theoretically, such as the production function approach (outlined in chapter 5). First, we provide an overview of the extant literature on the topic and briefly discuss some theoretical aspects (section 7.2). Section 7.3 discusses the empirical methodology and estimation procedure. Section 7.4 describes the data and discusses some descriptive statistics. Results of the “in-sample” and “out-of-sample” analysis are presented in sections 7.5 and 7.6, respectively.