The Time Augmented Cobb-Douglas Production Function as a Tool of the Potential Output Estimation

The main aim of this paper is to propose and verify the most appropriate specification of the time augmented Cobb-Douglas production function and use it as an alternative way for the potential output and production gap estimation in the Visegrad Four countries, Austria and Germany during 1995-2015. We also compare the results based on the time augmented Cobb-Douglas production function including all parameters estimated and the approach based on the commonly used assumption that the labour factor intensity parameter is defined as a share of labour compensation in GDP. All the models are estimated via Nonlinear Least Squares technique and the time series data are sourced from the EU KLEMS and OECD database. Based on the results we evaluate the individual specifications with respect to the economic output development in each of the investigated countries. The results also show this function can be used as an alternative way for the purpose of the potential output analysis.