School of Economics and Finance

No. 503: An Economical Approach to Estimate a Benchmark Capital Stock. An Optimal Consistency Method

Jose Miguel Albala-Bertrand , Queen Mary, University of London

December 1, 2003

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There are alternative methods of estimating capital stock for a benchmark year. However, these methods are costly and time-consuming, requiring the gathering of much basic information as well as the use of some convenient assumptions and guesses. In addition, a way is needed of checking whether the estimated benchmark is at the correct level. This paper proposes an optimal consistency method (OCM), which enables a capital stock to be estimated for a benchmark year, and which can also be used in checking the consistency of alternative estimates. This method, in contrast to most current approaches, pays due regards both to potential output and to the productivity of capital. It works well, and it requires only small amounts of data, which are readily available. This makes it virtually costless in both time and funding.

J.E.L classification codes: O4, B4

Keywords:Benchmark capital, Perpetual Inventory Method (PIM), Potential output, Capital productivity, Optimal Consistency Method (OCM)