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Journal ArticleDOI

An Exploration of Real-Time Revisions of Output Gap Estimates Across European Countries


Abstract: This document analyses real-time revisions in output gap estimates published by the European Commission for 15 countries over the period 2002-2014. We find that output gap revisions (both in levels and changes) are mainly driven by GDP growth forecast errors. Also, output gap revisions have opposite signs across expansions and recessions: real-time output gaps are downward biased (smaller than the final estimates) during expansions and upward biased (higher than the final estimates) in recessions. Our findings may have relevant implications for the conduct and assessment of fiscal policy in real time. For instance, according to our results, real-time estimates of the structural balance would be upward biased in expansions and downward biased in recessions. This implies that the fiscal stance of an economy estimated in real time would be excessively expansionary in recessions as compared to the final estimate. As a result, we argue that corrections to real-time estimates of the structural balance suggested in the literature should be contingent on the degree of slack in the economy.
Topics: Output gap (58%)

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AN EXPLORATION OF REAL-TIME
REVISIONS OF OUTPUT GAP
ESTIMATES ACROSS EUROPEAN
COUNTRIES
Documentos Ocasionales
N.º 1605
Pablo Hernández de Cos, Aitor Lacuesta
and Enrique Moral-Benito
2016

AN EXPLORATION OF REAL-TIME REVISIONS OF OUTPUT GAP ESTIMATES
ACROSS EUROPEAN COUNTRIES

Documentos Ocasionales. N.º 1605
2016
Pablo Hernández de Cos, Aitor Lacuesta and Enrique Moral-Benito
BANCO DE ESPAÑA
AN EXPLORATION OF REAL-TIME REVISIONS OF OUTPUT GAP
ESTIMATES ACROSS EUROPEAN COUNTRIES

The Occasional Paper Series seeks to disseminate work conducted at the Banco de España, in the
performance of its functions, that may be of general interest.
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© BANCO DE ESPAÑA, Madrid, 2016
ISSN: 1696-2230 (on line)

Abstract
This document analyses real-time revisions in output gap estimates published by the European
Commission for 15 countries over the period 2002-2014. We nd that output gap revisions
(both in levels and changes) are mainly driven by GDP growth forecast errors. Also, output
gap revisions have opposite signs across expansions and recessions: real-time output gaps
are downward biased (smaller than the nal estimates) during expansions and upward biased
(higher than the nal estimates) in recessions. Our ndings may have relevant implications for
the conduct and assessment of scal policy in real time. For instance, according to our results,
real-time estimates of the structural balance would be upward biased in expansions and
downward biased in recessions. This implies that the scal stance of an economy estimated in
real time would be excessively expansionary in recessions as compared to the nal estimate.
As a result, we argue that corrections to real-time estimates of the structural balance suggested
in the literature should be contingent on the degree of slack in the economy.
Keywords: Output-gaps, real-time data, scal policy.
JEL classi cation: E32, E52, E60.

Citations
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References
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Posted ContentDOI
01 Jan 2010-
Abstract: This paper provides a detailed description of the current version of the Ecofin Council approved production function (PF) methodology which is used for assessing both the productive capacity (i.e. potential output) and cyclical position (i.e. output gaps) of EU economies. Compared with the previous 2010 paper on the same topic, there have been two significant changes to the PF methodology, namely an overhaul of the NAWRU methodology & the introduction of a new T+10 methodology.

274 citations


"An Exploration of Real-Time Revisio..." refers background or result in this paper

  • ...This evidence is in line with that of Kempkes (2014), who claims that, as a result of the downward biases in real-time output gap estimates, structural balances are always over-estimated in real time....

    [...]

  • ...This fi nding casts doubt over the result by Kempkes (2014), who argues that resulting structural balances are always over-estimated in real time because output gaps are downward-biased in real time....

    [...]

  • ...Therefore, the type of corrections to realtime estimates of the structural balance suggested by Kempkes (2014) should be contingent on the degree of slack in the economy....

    [...]

  • ...According to these results, while the over-estimation of structural balances advocated by Kempkes (2014) holds during expansions, it becomes an under-estimation during recessions....

    [...]

  • ...According to this pattern, while the over-estimation of structural balances advocated by Kempkes (2014) holds during expansions, it turns to under-estimation during recessions....

    [...]


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Abstract: The economic crisis affecting the industrialized countries in recent years has been singular given its intensity, complexity and the difficulties in overcoming it. The aim of this paper is to analyze the determinants behind the crisis that have made it deeper and longer in Spain than in previous instances, and which have meant that there are significant obstacles to emerging from recession. Spanish EMU membership is a crucial aspect for consideration, as it contributes both to explaining the build-up of imbalances in the expansion and to conditioning the nature of the adjustment in the crisis, given that the range of economic policy instruments is significantly narrower in EMU. The macroeconomic and financial imbalances accumulated in the high-growth phase (the real estate boom, excess debt and the loss in competitiveness), which are all closely interlinked, were factors of vulnerability. But even apparently sounder fundamentals on other fronts, such as the budgetary and labor market situation, saw their weaknesses exposed in the crisis. The experience over the past four years allows some lessons to be drawn on the external sector, the real estate market, fiscal policy and the labor market. These lessons point in particular to the need to avoid complacency in economic policy management in boom periods and to the urgency of adapting the structure of goods and factor markets and the behavior of economic agents in Spain to the requirements imposed by membership of a monetary union.

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Abstract: This paper reviews some of the applications that use the vast swathes of information provided by Internet user searches for economic analysis and forecasting. This enormous volume of information, available in real time, can be handled by analysts thanks to statistical tools such as “Google Insights for Search”, which allow trends in different areas of interest to be classified and evaluated. Previous work focused predominantly on the labour market, on the housing market, on retail sales and on consumer confidence. This paper presents a very specific application for the Spanish economy: British tourist inflows to Spain (the Spanish tourist industry's main customers). The improvement in the forecasting provided by the short-term models that include the G-indicator depends on the benchmark model. This does, however, allow an adjusted indicator of the inflow of British tourists to be obtained with a lead of almost one month. This is but an initial step in the use of on-line searches for constructing leading indicators of economic activity. Other applications to be explored are car sales, consumer confidence and house purchases. The chief characteristic of these procedures is that, with time and the continuous growth of Internet use, results can only improve in the future. It should nonetheless be recalled that the construction of these G-indicators requires caution so as to avoid mistakes arising, inter alia, from the different use of language in different countries. Not taking due caution and blindly confiding in these indicators may lead to erroneous results being obtained.

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