Alternative methods of estimating potential output in Albania

The aim of this paper is to estimate potential output and output gap for Albania, over the period 1996-2006. Potential output is estimated using the methods of linear regression, Hodrick Prescott filter and the production function approach. The results of the three methods are compared using the time domain analyses for measuring economy’s cycle and their severity. These tests indicate that the production function approach estimates fewer economic cycles with the lowest variance. Given that it also provides a supply side of the economy, this approach appears to be more relevant in estimating potential output gap in Albania.