Abstract

Estimates of latent macroeconomic variables like Output Gap and Potential Output have Monetary and Fiscal policy significance at high data frequency. Unlike previous, this study aims to circumvent the issue of dearth of quarterly national Income accounts for Pakistan by estimating a robust proxy for real total output based on Large Scale Manufacturing Index (LSM). This paper implements three commonly employed methods for estimating the output gap, these include; State–Space model, Wavelet filter and Structural VAR model. I conclude that in line with the macroeconomic aggregates; demand pressures in Pakistan have subsided since FY2009Q3 in addition negative output gap since 2011Q3 is due to slowdown in real economy, i.e., the aggregate supply. Lastly, I forecast that the current trend of low aggregate demand is expected to last until FY2015Q4.

 

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