Empirical Relationships Between Investment Decisions and Potential Output: The Case of Mozambique

Abstract

This paper focuses on the relationship of investments decisions, in consistence with the endogenous potential output growth hypothesis, in Mozambique. The VAR method was used to make the empirical analysis of potential output and investment decisions between the periods of 1996:1 to 2012:4. The potential output was not an observed variable and it was estimated using the Hodrick-Prescott Filter. The results from the impulse responses from VAR (3) model through the 10 quarters, have shown that the potential output responds positively through the period of analysis to changes in investment. And in the same way investments respond passively to shocks on potential output. This results highlighted important implications for conduction of economic policy as a whole.

Keywords: Aggregate Demand, Potential output and Investment.