Series: Occasional Papers. 1104.
Author: Pablo Hernández de Cos. Mario Izquierdo. Alberto Urtasun..
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Abstract
This paper seeks to estimate the potential output of the Spanish economy, using the
production function methodology standard in the literature. According to these estimates,
the growth of the potential output of the Spanish economy stood at around 3% in the
period 2000-2007, owing to the marked increase in the population and in the participation
rate and the fall in structural unemployment, as well as vigorous capital accumulation.
The contribution of these factors to potential output was reduced by the negative
evolution of total factor productivity. In addition, the economic crisis is estimated to have
had a significant negative impact on potential output, which has primarily taken the form of
a large increase in structural unemployment, a sharp slowdown in population growth, as a
consequence of the loss of momentum in immigrant inflows, and a reduction in the
contribution of the capital stock resulting from the impact of the crisis on investment.
As a result, the potential growth of the Spanish economy stands at around 1% during
the crisis years and in the years immediately thereafter, insofar as some of these negative
effects take place with a certain time lag. Lastly, in the medium term, the potential output
of the economy is estimated to recover progressively, once the effects of the crisis have
disappeared, reaching growth rates about 2%, against a background of negative rates
of change in the population of age 16-64, a smooth improvement in the NAIRU, a slight
recovery in investment and a higher contribution from TFP. The application of a strong
process of structural reforms could, however, significantly improve the growth prospects
of our economy.