Estimating Potential Output for Taiwan with Seasonally Unadjusted Data.

Measuring potential output and the output gap have long been an important task for conducting monetary and fiscal policies. There exist several methods for this purpose and a partial list includes the univariate detrending method, the multivariate filtering approach, and the structural VAR system approach. One common feature of all these methods is assuming the existence of a unit root for the unobserved potential GDP. While this assumption is appropriate for the cases of US and most European countries where macroeconomic data are seasonally adjusted, it does not fit the Taiwanese economy. Almost all of Taiwan's macroeconomic data are seasonally unadjusted, and the seasonal unit root as well as richer dynamics have to be embedded in the model. In this paper, we analyze the impact of seasonality on various potential output measures. To check robustness and investigate how sensitive the results are to further changes in the specification of the NAIRU and the unemployment gap, distinct classes of NAIRU and unemployment gap concept are implemented. Empirical analysis confirms the importance of seasonal behavior. Switching from a regular unit root to a seasonal unit root improves the efficiency of measuring potential GDP and output gap for Taiwan and provides more relevant information in conducting monetary and fiscal policies. [ABSTRACT FROM AUTHOR]