Potential Gdp Growth in Venezuela: a Structural Time Series Approach

Real GDP and oil prices are decomposed into common stochastic trend and cycle processes, using structural time series models. Potential real GDP is represented by the level of the trend component of real GDP. The potential rate of growth of real GDP is represented by the stochastic drift element of the trend component. We find that there is a strong association at the trend and cycle frequencies between real GDP and the real price of oil. This association is also robust in the presence of key economic policy variables. In the 1970-1980 period, when the underlying annual rate of increase of the real price of oil was 12 percent, the underlying annual rate of increase of potential GDP in Venezuela was 2.6 percent. By contrast, in the 1981-2000 period when the underlying rate of increase of the real price of oil was –5 percent, the underlying growth rate of potential GDP fell to 1.5 percent. However, the strength of association between the underlying growth of oil prices and real GDP has fallen considerably since the early 1980s, suggesting that oil cannot be relied upon as an engine for future growth in Venezuela.