Estimating the Output Gap for Emerging Countries: Evidence from Five Southeast Asia Countries

Abstract

This paper presents an application of a bi-variate unobserved components model of output and inflation to estimate the output gap for five emerging economies in Southeast Asia, including the Philippines, Malaysia, Vietnam, Indonesia, and Thailand. In this paper, time-varying stochastic volatility terms are added in the model to exhibit the change in the size of shocks to the trend and cyclical components of output and inflation of these economies. The results show that estimated output gaps are able to identify the recessions of these economies. Although the shape and magnitude of estimated gaps differ from country to country, these gaps imply that these economies tend to converge to a more stable business cycle over time, except for that of Malaysia. Secondly, inflation is very sensitive to the output gap in Vietnam and Indonesia, but not to those in the Philippines, Malaysia, and Thailand. Thirdly, results suggest that time-varying stochastic volatility is clearly seen in the innovations to the output gaps of the five emerging economies, and Indonesia's potential output. Meanwhile, results confirm that there is no need to add stochastic volatility terms in trend components of output and inflation, except for Indonesia's potential output.