Decomposition of Russian
GDP growth rates
in 1999-2014
Maria Kazakova, PhD,
Gaidar Institute for Economic Policy
and Russian Presidential Academy of National Economy
and Public Administration
Paris, OECD,
July, 25 2014
Background
 Our methodology suggests the decomposition of Russian GDP
growth rates into 3 components:
 Structural (or potential) component (determined by
fundamental growth factors, i.e. capital and labor)
 Foreign trade component (due to raw materials’ prices
dynamics, approximated by world oil prices)
 Cyclical component (includes both business cycles and
random shocks, i.e. world economic crisis)
 Smoothing methods based on filters (trend method, HodrickPrescott filter etc.) have several major drawbacks (i.e. they don’t
count for structural relationships in the economy, can be used for
large data samples etc.)
 Our algorithm is based on production function approach adopted
by OECD and used for potential output and output gap
estimation, described in Giorno C., Richardson P., Roseveare D.
and van der Noord P. (1995) «Estimating Potential Output,
Output Gaps and Structural Budget Balances»//Economics
Department Working Papers No. 152, OECD
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(www.oecd.org/dataoecd/2/43/33928808.pdf).
Step 1: Calculation of structural component
Production function method:
 Allows for potential output estimation through calculation of labor and capital
contribution to economic growth;
 Implies a two-factor Cobb-Douglas function (in linearized form) in terms of
growth rates for our purposes;
 Given actual statistics on capital and labor as well as  and β, we then
calculate TFP and smooth it using Hodrick-Prescott filter technique to obtain
potential TFP (e*);
 We don’t smooth capital input;
 We estimate potential labor and finally obtain potential (or structural in our
terms) GDP growth rate according to the following formula:
y*   n * (1   )k  e*,
where y* is potential GDP growth rate,
k is capital growth rate (fixed assets adjusted for the level of capacity utilization),
n* is potential labor growth rate calculated according to the OECD methodology,
e* is potential TFP growth rate,
=0.3, β = 0.7 are previously estimated elastisities of capital and labor,
respectively.
We don’t split the economy in 2 sectors (business and government) due to the
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lack in Russian statistics.
Total factor productivity growth in 1991-2014
(% to previous year)
0,08
0,06
0,04
0,02
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-0,02
-0,04
-0,06
-0,08
-0,1
-0,12
4
Potential TFP growth rate in 1991-2014 (% to
previous year)
0,06
0,04
0,02
0
-0,02
-0,04
-0,06
-0,08
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Actual, structural and “residual” GDP growth
rates in 1999-2014 (% to previous year)
12.00%
10.00%
8.00%
6.00%
4.8% 4.9% 5.0% 5.1% 5.1% 5.1% 4.9% 4.7%
4.5% 4.1%
4.00%
3.7%
3.4%
2.00%
3.0%
2.6%
2.2%
1.8%
0.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-2.00%
-4.00%
-6.00%
-8.00%
-10.00%
actual GDP growth rate
structural GDP growth rate
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Step 2: Calculation of foreign trade
component of GDP growth rate
 Special feature of Russian economy: high level of dependence on
energy prices and export dynamics. This feature is not captured by
the OECD methodology;
 So we modify the OECD methodology by calculating foreign trade
component of Russian GDP growth which is dependent on world oil
prices dynamics;
 Dependence between GDP and oil price levels can be described by
the following so called “investment mechanism” within the
framework of Solow growth model: improvement of terms of trade
(higher oil price level) implies income transfer to the economy (i.e.
additional export revenue) which can be invested in capital and thus
translates in higher GDP level in long run;
 But we also observe transition dynamics between different states of
the economy, i.e. different GDP growth levels. This dynamics is can
be described by dependence between GDP growth and oil price
level;
 This (transition) mechanism can be amplified by reaction of
economic agents on their income changes due to oil price dynamics
similar to Friedman’s permanent income hypothesis.
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 Foreign trade component in our terms is due to difference
between actual and long-term average world oil price
(calculated as 10-year moving average of oil price);
 So to calculate this component of GDP growth we estimate
the following regression:
𝑃_𝑜𝑖𝑙𝑡
𝑟𝑒𝑠𝑖𝑑
∆𝑌𝑡
= 𝛾0 + 𝛾1
+ 𝜏𝑡 (2)
𝑃_𝑜𝑖𝑙𝑡
where is difference (“residuals”) between actual and structural
GDP growth rates which doesn’t depend on fundamental
growth factors,
𝑃_𝑜𝑖𝑙𝑡
𝑃_𝑜𝑖𝑙𝑡
is ratio between actual and long-term average level of oil
price Brent;
 We consider ratio between these oil prices in order to
capture the scale effect of oil price changes as well as the
role of initial oil price level;
 The estimated dependent variable in regression (2)
represents foreign trade component of GDP growth.
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Actual GDP growth rate and its 3 components
in 1999-2014 (% to previous year)
15.00%
10.00%
5.00%
0.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-5.00%
-10.00%
-15.00%
actual GDP growth rate
structural GDP growth rate
foreign trade GDP growth rate
cyclical GDP component (business cycle+random shocks)
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Step 3: Calculation of cyclical
component of GDP growth rate
 Cyclical component in our methodology is the
sum of business-cycles and random shocks;
 It is calculated on the residual basis, i.e. can be
considered as residuals obtained after
regression (2) estimation
 In other words cyclical component equals actual
GDP growth minus it’s structural and foreign
trade components
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Cyclical GDP growth rate in 1999-2014 (% to
previous year)
6.00%
3.87%
4.00%
2.00% 1.15%
0.00%
1.76%
1.09%
0.48%
0.97%
-0.13%
-0.55%-0.61%
-0.80%
-0.92%
-1.22%
1999 2000 2001 2002 2003 2004 2005 2006 2007 -1.52%
2008 2009 2010 2011 2012 -1.98%
2013 2014
-2.00%
-1.59%
-4.00%
-6.00%
-8.00%
-10.00%
-12.00%
-12.50%
-14.00%
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Output gap in 1999-2014 (%)
14.00%
13.09%
12.00%
11.97%
10.00%
8.00%
7.88%
6.00%
4.59%
4.00%
3.57%
3.30%
2.73%
2.68%
2.00%
0.00%
-0.04%
0.42%
0.00%
1999
2000
2001
2002
2003
-0.47%
1.88%
1.49%
1.38%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-2.00%
-4.00%
-4.64%
-6.00%
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Discussion of results
 Structural component evolves from 4,8% in 1999 to 1,8%
in 2014 due to recovery growth and TFP growth after
financial crisis in 1998, capacity utilization and
investment dynamics and stagnation;
 Foreign trade component evolves from 0,4% in 1999 to
2,7% in 2008 and then it falls to 0,9% in 2014;
 Cyclical component is volatile and is due to ruble
devaluation effect and growth factors’ and investment
fluctuations, economic overheating, crisis and
stagnation.
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Questions
 Quality of statistics, mainly regarding capital (in
Russia it is one of the main problems; official fixed
assets estimate is highly overestimated, adjustments
are questionable);
 What is the base year for output gap calculation;
 Output gap calculation and interpretation (output gap
in Russia based on actual and structural GDP
numbers is positive after 2009 crisis whereas in
OECD countries it’s not the case. This is probably due
to oil prices contribution).
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THANK YOU FOR YOUR
ATTENTION!
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