Can We Delineate Potential Output for an Economy in Transition? Search for a Benchmark

Barta, V. (1994). Can We Delineate Potential Output for an Economy in Transition? Search for a Benchmark. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-94-051

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Abstract

This paper was stimulated by a striking discrepancy which exists between the frequency with which the concept of potential output is dealt with in every basic macroeconomic textbook and nearly complete absence of any comprehension of what might have happened to potential output in economies in transition. Although the search for this macroeconomic pivotal point may look like solving an intellectual puzzle, the real challenge lies in implications of changes in potential output for effective policy-making during the transformation period. This paper points out some weaknesses of applying standard macroeconomic concepts (like Okun's law) and illuminates the necessity of using indirect and mezzo-economic approaches. Despite the difficulty of making a new definition of potential output operational, this paper suggests the usefulness of introducing a kind of transformation bridge which should methodologically facilitate understanding the concept of potential output when moving from a centrally planned economy to a market one.

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