Estimation of output gap and investigate impactful factors on it in the economy of Afghanistan (2008-2017)

Abstract

The output gap reflects the economy performance of a country, thereby increase or decrease leads to inflation or stagnation. Production output gap can determine the direction of economic policy for growth of countries. The purpose of this study is to estimate the output gap and to investigate the impact of real exchange rate, export and import on it in Afghanistan during the years (2008-2017). The Hodrick-Prescott model is used to estimate the output gap and Vector auto regression (VAR) model is used to investigate the impact of 3 variables (real exchange rate, export, and import) on dependent variable (output gap). The data applied in this study was seasonal. Results show that Gross Domestic Product (GDP) had fluctuation during (2008-2017), relatedly real exchange rate had a positive effect, export and import had negative effects on the output gap. According to variance analysis, the real exchange rate had the highest effect and import had the lowest effect. At the end, based on the variance analysis results, the instant functions show that incoming momentum of output gap and exchange rate will cause strong fluctuations in Gross Domestic Product (GDP) trend, relatedly export and import cause weak fluctuation.