POTENTIAL OUTPUT ESTIMATES FOR BRAZIL: A CRITICAL ASSESSMENT

Abstract

Since the beginning of operation of the inflation targeting system (ITS) in Brazil, it’s turning more important to estimate the output gap, that according to the model that sustain theoretically the ITS – The New Consensus model - is the main cause of the long run inflation. The present paper aims to evaluate critically the studies and working papers written by researchers of brazilian official institutions (like Brazilian Central Bank and IPEA) and Universities that estimate the potential output for the Brazilian economy. We will evaluate the reasonability of the empirical findings produced by these estimations and the compatibility with the New Consensus theory, which is the theoretical basis of the model that sustain the ITS. We conclude that (1) the more exogenous and supply driven (stock of production factors, productivity and NAIRU) is the estimated potential output, the weaker are the empirical outcomes, in consequence of significant and persistent negative output gaps; and (2) that the attempt to fix this method with the use of statistical filters turns the potential output endogenous and depending on the role of the current output and effective demand, a result that is incoherent with the New Consensus theory that sustain the model.