How Informative Are Real Time Output Gap Estimates in Europe?

By Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, Simon Voigts

September 20, 2019

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Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, and Simon Voigts. How Informative Are Real Time Output Gap Estimates in Europe?, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.

Subject: Fiscal policy, Fiscal stance, Inflation, Output gap, Potential output, Prices, Production

Keywords: Business Cycles, Debt buildup, Europe, Fiscal Policy, Fiscal stance, Inflation, Mean output gap property, Monetary Policy, Output gap, Output gap bias, Output gap estimate, Output gap revision, Potential Output, Real-time estimate, Real-time output gaps, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/200
Stock No:

WPIEA2019200
ISBN:

9781513512549
ISSN:

1018-5941

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