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The Treasury has been testing the assumptions on the potential growth rate of the New Zealand economy. In this paper, we estimate a small macro model using Bayesian techniques, which allows us to assess the level of uncertainty of the estimates of the output gap. The model is based on the work of Benes et al. (2010) with some modifications reflecting New Zealand economic conditions. Although this new technique does not reduce the uncertainty in measures of potential output as indicated by large confidence bands for the estimates, it provides us a useful tool with an economic framework for measuring potential output.
I would like to thank Michael Ryan, Peter Mawson, Jamie Murray, Patrick Conway, Michael Reddell, Thora Helgadottir, Graeme Wells,
Kirdan Lees and Brigid Monagel for helpful comments on an earlier version of this paper.
The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s).
They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.