Potential Output Estimate Using a Grey Production Function Approach

Due to the problems existing in the statistical data series and the complexity of the processes that Romania crossed the last years, in this paper, we combined the production function potential output method with GM(1,1) grey algorithm to obtain a better approximation of the potential output. The production function method was applied to grey Cobb-Douglas and grey CES production functions, using variable NAIRU for potential labor approximation and NAICU for potential capital stock approximation. The NAIRU estimate is an original two-step methodology based on expectation augmented Phillips curve approach and the Kalman filter approach, with NAIRU dynamics given by an AR(2) process. Using grey adjustments of the actual data for real GDP, real capital stock, and labor, we obtained satisfactog estimators for the production functions, from economic and statistic points of view. The estimated elasticity of technical substitution for CES production function is close to one, which proves a high consistency of Cobb-Douglas and CES models.