Estimating potential output per capita for Zimbabwe.

ABSTRACT

The thrust of this study was to estimate the potential output per capita of Zimbabwe using Structural Vector Autoregressive method (SVAR). The study used quarterly data for the period 1990 to 2012 on the following variables: Gross Domestic Product per Capita (GDPC), Consumer Price Index and unemployment rate presented as yet, pt and ut respectively. The long‐run SVAR model estimation was done to show the permanent effect of unemployment, consumer price index and gross domestic product per capita on the potential output of the economy. The SVAR model appropriately captured the recessions of 2000, 2002 and that of 2006-2008. The estimated potential output shows that it does not deviate significantly from the actual output. In addition the potential output per capita for Zimbabwe declined or in other words shifted inwards for the period 2000 to 2010 but it has been increasing since 2011. The reasons for the decline had been suggested to be migration of skilled labour force, capital outflow, and the fast track land reform programme initiated by government at the turn of the millennium. The researcher recommends that the extensions of this investigation could incorporate estimating the natural rate of unemployment (NAIRU), and formulate policies of reducing it. The NAIRU is another variable which is also important in macroeconomics because when the economy is operating efficiently and producing at its potential; unemployment has to be at its NAIRU level.