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Journal Article•DOI•

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

Pablo Hernández de Cos1, Aitor Lacuesta1, Enrique Moral-Benito2, Enrique Moral-Benito1•
Bank of Spain1, Charles III University of Madrid2
28 Jul 2016-Social Science Research Network-
TL;DR: In this article, the authors analyzed real-time revisions in output gap estimates published by the European Commission for 15 countries over the period 2002-2014 and found that output gap revisions are mainly driven by GDP growth forecast errors.
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.

Summary (2 min read)

Jump to: [1 Introduction] – [2 Data] – [REAL AND POTENTIAL GROWTH REVISIONS] – [SOURCES OF REAL GROWTH REVISIONS] and [5 Concluding Remarks]

1 Introduction

  • The output gap is the extent to which the level of aggregate economic activity exceeds (or falls short of) the economy's productive capacity, i.e. the gap between actual and potential output.
  • It is very often the case that these methods provide different results.
  • These empirical regularities are of course important for policy analysis.
  • According to their fi ndings, the bias in structural balances cannot be systematically corrected as it depends on the state of the economy; (ii) the same happens with the real-time revisions of the changes in the output gaps.

2 Data

  • The authors data are taken from the European Commission's real-time output gap database.
  • In particular, chart 1 shows that output gap revisions are signifi cant in terms of magnitude with an average change of 0.71 pp.
  • In the case of Spain, the revisions during expansions are around 4.4 pp. on average, while the magnitude in recession periods is lower but still large, at -2.0 pp.
  • 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.
  • To shed some more light on the factors behind the revisions to real time output gaps in levels, the authors fi rst explore the role played by revisions in GDP growth and potential growth, which are the main determinants of output gap estimates.

REAL AND POTENTIAL GROWTH REVISIONS

  • (ΔlnY t t+1 -ΔlnY t t-1 ) = (Data revision) + (Forecast error) where superscripts refer to the year in which the GDP growth chart is released.
  • In contrast, any revision between the forecast publication at t-1 and the data release at t+1 is assumed to be entirely due to forecast errors.
  • The average revision in GDP growth during recessions is -2.99, which is the sum of an average forecast error of -2.88pp.
  • This correlation vanishes when the authors consider revisions in potential growth estimates.
  • Indeed, a regression of the three factors confi rms that revisions in GDP growth are able to explain around 40% of the change in output gap revisions and its associated coeffi cient is signifi cant, while the coeffi cient on potential growth revisions is not signifi cant and the corresponding R2 falls from 40% to 2%.

SOURCES OF REAL GROWTH REVISIONS

  • This decomposition allows us to quantify the contributions of historical real-time revisions in GDP and potential growth together with the initial output gap revisions.
  • In addition, the authors can also decompose the revisions in actual GDP growth into data revisions and forecast errors as described above.
  • To be more specifi c, the authors use this decomposition for the case of Spain in Chart 9 to confi rm that forecast errors (brown bar) are the main driver of the magnitude and the symmetric behavior of revisions in output gaps (blue line).
  • Note also that the residual (yellow bar) includes not only the initial revision in the output gap -2004 in their data -but also the numerical error due to the logarithmic approximation of the decomposition.

5 Concluding Remarks

  • The authors have analysed the size and the cyclical behavior of revisions of the output gap in levels and changes.
  • This defi nition of real time is relevant within several fi scal rules such as those used in the Excessive Defi cit Procedure of the European Union.
  • Moreover, the authors fi nd that revisions in output gap levels are primarily due to macroeconomic forecasting errors, while data updates play a minor role.
  • 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.
  • Turning to real time revisions in potential growth fi gures, the authors fi nd that they are not only smaller than those of actual GDP, but also symmetric across expansion and recession (i.e. real time potential growth estimates are always larger than the fi nal estimates regardless of the cycle).

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Content maybe subject to copyright    Report

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.
The opinions and analyses in the Occasional Paper Series are the responsibility of the authors and,
therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.
The Banco de España disseminates its main reports and most of its publications via the INTERNET at the
following website: http://www.bde.es.
Reproduction for educational and non-commercial purposes is permitted provided that the source is
acknowledged.
© 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 fi 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 fi nal estimates) during expansions and upward biased
(higher than the fi nal estimates) in recessions. Our fi ndings may have relevant implications for
the conduct and assessment of fi 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 fi scal stance of an economy estimated in
real time would be excessively expansionary in recessions as compared to the fi 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, fi scal policy.
JEL classifi cation: E32, E52, E60.
Citations
More filters
Posted Content•
Evaluating the macro-representativeness of a firm-level database: an application for the spanish economy

[...]

Miguel Almunia, David Lopez-Rodriguez, Enrique Moral-Benito
01 Mar 2018
TL;DR: In this paper, a new representative firm-level dataset for Spain using detailed micro-level information provided by firms to the Spanish Commercial Registry and the Bank of Spain is presented, which is able to replicate the growth rates of output, employment and wage bill of the private sector.
Abstract: espanolLa disponibilidad de una base de datos en el ambito de empresa que sea representativa del sector productivo de una economia a escala agregada es una condicion necesaria para realizar tanto analisis de politica economica como investigacion economica fiables en multiples areas. En este trabajo, se documenta la construccion de una nueva base de datos de empresas espanolas utilizando informacion detallada a escala microeconomica proporcionada por las empresas al Registro Mercantil y al Banco de Espana. La comparacion con los agregados que emergen de la Contabilidad Nacional sirve para ilustrar como la nueva base de datos de naturaleza microeconomica es capaz de replicar las tasas de crecimiento del producto, el empleo y la remuneracion de asalariados del sector privado. Utilizando las estadisticas ofi ciales del Instituto Nacional de Estadistica (INE), el analisis presentado muestra como la base de datos resultante cubre mas del 80 % de las empresas registradas en el censo del DIRCE en el periodo 2000-2013 y, de manera mas relevante, la base de datos es capaz de replicar la distribucion de empresas por tamano de la economia de mercado, excluyendo el sector financiero, de Espana. El mismo analisis de representatividad se realiza para el sector industrial, mostrando que este sector esta particularmente bien representado en la nueva base de datos. EnglishThe availability of a firm-level database that represents the productive sector of an economy at the aggregate level is a necessary condition to undertake both reliable policy analysis and economic research in multiple areas. In this paper, we document the construction of a new representative firm-level dataset for Spain using detailed micro-level information provided by firms to the Spanish Commercial Registry and the Bank of Spain. A comparison with National Accounts figures serves to illustrate that the new micro-dataset is able to replicate the growth rates of output, employment and wage bill of the private sector. Using official statistics from the National Institute of Statistics (INE), we show that the resulting dataset covers more than 80% of firms registered in the census over the years 2000-2013 and, more importantly, the resulting dataset replicates the fi rm size distribution of the Spanish non-financial market economy. The same representativeness analysis is done for the manufacturing sector indicating that this sector is particularly well-represented in the dataset.

47 citations

Book Chapter•DOI•
Determinants and Implications of Low Global Inflation Rates

[...]

Juan Carlos Berganza1, Fructuoso Borrallo1, Pedro del Río1•
Bank of Spain1
01 Jan 2018
TL;DR: In this article, the authors look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession.
Abstract: In this chapter we look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as changes in inflation’s cyclical sensitivity to economic slack, in the role being played by forward-looking and backward-looking inflation expectations, or in the relevance of global factors. We then test empirically whether changes in the coefficients of the Phillips curve in the wake of the global financial crisis can explain the behaviour of inflation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the findings are insufficiently robust to offer a satisfactory explanation of the recent course of inflation. Nevertheless, the persistence of inflation and the increased importance of backward-looking inflation expectations in some countries may pose risks for inflation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low inflation over an extended period and analyse the policy options for addressing this problem.

43 citations

Journal Article•DOI•
Monitoring the Spanish Economy From a Regional Perspective: Main Elements of Analysis

[...]

Concha Artola1, María Gil1, Javier J. Pérez1, Alberto Urtasun1, Alejandro Fiorito2, Diego Vila3 •
Bank of Spain1, National University of Luján2, University of Amsterdam3
27 Dec 2018-Social Science Research Network
TL;DR: In this paper, the authors provide an overview of the available data for monitoring macroeconomic and public finance developments at the regional level in Spain, and present some examples of its practical use in real time.
Abstract: In highly decentralized countries the subnational dimension of economic developments acquires particular relevance, given the existence of potential spillover effects across jurisdictions or the existence of asymmetric impacts of national-wide macroeconomic shocks. At the same time, though, the analysis of sub-national macroeconomic and public finance short-term developments tend to be restricted in many countries due to data limitations. Against this backdrop, the aim of this paper is to provide an overview of the available data for monitoring macroeconomic and public finance developments at the regional level in Spain, and to present some examples of its practical use in real time. After a thoroughly review of the publicly available information, we identify two key informational gaps in this area of conjunctural analysis, namely: (i) the lack of homogeneous and official quarterly measures of aggregate regional economic activity (in particular, real GDP), and (ii) the limited sample size of time series pertaining to government budgetary developments at the regional level.

42 citations

Posted Content•
An estimation of the effects of Brexit on trade and migration

[...]

Rodolfo G. Campos, Jacopo Timini
01 May 2019
TL;DR: In this article, the authors used a gravity model approach to estimate the effects of Brexit in two dimensions: trade in goods and migration, and found that trade flows are predicted to drop by 30% and migration by close to 25%.
Abstract: espanolEste documento utiliza un modelo de gravedad para estimar los efectos del brexit en dos dimensiones: el comercio de bienes y la migracion. Simulamos dos escenarios: 1) no acuerdo, con reversion a las reglas de la OMC y sin trato especial para los migrantes; 2) firma de un acuerdo bilateral de libre comercio (TLC). Segun nuestros resultados, el brexit puede tener efectos negativos importantes sobre el comercio y los flujos migratorios entre la UE y el Reino Unido. En el escenario de la OMC, se preve que los flujos comerciales disminuyan en un 30 % y la migracion en cerca de un 25 %. Si el Reino Unido y la UE firman un acuerdo similar a un TLC (que no incluye la libre movilidad de la mano de obra), los efectos negativos sobre el comercio se reducen, aunque no hay una diferencia significativa en terminos de migraciones con respecto al escenario de la OMC. EnglishThis paper uses a gravity model approach to estimate the effects of Brexit in two dimensions: trade in goods and migration. We simulate two scenarios: 1) no agreement with reversion to WTO rules and no special treatment for migrants; 2) signature of a bilateral free trade agreement (FTA). According to our results, Brexit may have large negative effects on trade and migration flows between the EU and the UK. In the WTO scenario, trade flows are predicted to drop by 30% and migration by close to 25%. If the UK and the EU sign an FTA-like agreement (which does not include free mobility of labour), the negative effects on trade are lessened although there is no significant difference in terms of migration with respect to the WTO scenario.

40 citations

Posted Content•
Microsimulation tools for the evaluation of fiscal policy reforms at the Banco de España

[...]

Olympia Bover, Jose Maria Casado, Esteban García-Miralles, Roberto Ramos, José M. Labeaga 
01 Oct 2017
TL;DR: In this paper, the authors present the use of microsimulation models developed at the Banco de Espana for the study of fiscal reforms, describing the tool used to evaluate changes in the Spanish personal income tax and also the one for the value added tax and excise duties.
Abstract: espanolEste documento presenta los modelos de microsimulacion desarrollados por el Banco de Espana para el estudio de reformas fiscales. Por un lado, describe la herramienta de microsimulacion que evalua cambios en el impuesto sobre la renta de las personas fisicas (IRPF). Por otro lado, explica la herramienta del impuesto sobre el valor anadido (IVA) y los impuestos especiales. Para cada una de estas dos herramientas, el documento detalla como se estructura, los datos usados y los resultados que genera. Tambien se muestran las capacidades de estas herramientas mediante ejemplos sencillos de reformas fiscales hipoteticas, presentadas exclusivamente para ilustrar el uso de estos simuladores. EnglishThis paper presents the microsimulation models developed at the Banco de Espana for the study of fiscal reforms, describing the tool used to evaluate changes in the Spanish personal income tax and also the one for the value added tax and excise duties. In both cases the structure, data and output of the model are detailed and its capabilities are illustrated using simple examples of hypothetical tax reforms, presented only to illustrate the use of these simulation tools.

40 citations

References
More filters
Journal Article•DOI•
Structured Finance and the Financial Turmoil of 2007-2008: An Introductory Overview

[...]

Sarai Criado1, Adrian van Rixtel1•
Bank of Spain1
29 Aug 2008-Social Science Research Network
TL;DR: In this article, the authors provide an overview of the most important structured finance instruments in the context of the development of the financial turmoil that started in the third quarter of 2007 and continued into 2008 These financial market tensions were triggered by concerns about exposures of financial institutions to the most risky segment of the US mortgage markets.
Abstract: This paper provides an overview of the most important structured finance instruments in the context of the development of the financial turmoil that started in the third quarter of 2007 and continued into 2008 These financial market tensions were triggered by concerns about exposures of financial institutions to the most risky segment of the US mortgage markets - the so-called subprime mortgage market - and related financial instruments, which predominantly were related to structured finance As structured finance has developed very fast in recent years and often involves highly complex financial instruments and techniques, which may not be understood completely beyond a small circle of financial market experts, the aim of this paper is to provide an introduction to these instruments that may serve to better understand the specific characteristics of the financial turmoil In this context, the paper proposes a specific classification of structured finance and discusses both securitizations and credit derivatives with the aim of explaining their specific contributions to the development of the financial turmoil To this extent, the paper differentiates between two main categories of structured finance instruments The first one played an important role in the initiation and propagation of the turmoil and includes mortgage-backed securities (MBS), asset backed commercial paper (ABCP) and collateralized debt obligations (CDOs), both cash flow and synthetic The second category of structured finance instruments involves those that have been more instrumental in monitoring the crisis, both for market participants and policymakers The main instruments here are credit default swaps (CDS), of which examples are presented for both single name and index contracts Finally, the paper provides an overview of the specific contagion channels involving various structured finance instruments This will be conducted on the basis of examples for hypothetical financial institutions that are nevertheless representative for real world developments such as they occurred in the course of 2007 and 2008

61 citations

Report Series•DOI•
The Usefulness of Output Gaps for Policy Analysis

[...]

Isabell Koske1, Nigel Pain1•
Organisation for Economic Co-operation and Development1
01 Jul 2008-Research Papers in Economics
TL;DR: In this article, the authors investigated the uncertainty surrounding projections and early outturn estimates of such gaps and evaluated their usefulness for policy making in real time, finding that output gaps remain a significant influence on inflation, but their influence is now weaker than in the past.
Abstract: Measures of the gap between actual and potential activity are used frequently as indicators of the economic cycle and play a vital role in the conduct of monetary and fiscal policy. Given that output and unemployment gap estimates are often subject to considerable revision over time, this paper investigates the uncertainty surrounding projections and early outturn estimates of such gaps and evaluates their usefulness for policy making in real time. Current-year projections and initial outturn estimates of the gaps both appear to provide a reasonably good picture of the business cycle over the period studied, but one-year-ahead projections perform rather poorly. Projections made at cyclical turning points are subject to greater revision than those made at other times. Revisions to output gaps appear to stem primarily from revisions to actual rather than potential GDP. Empirical results show that output gaps remain a significant influence on inflation, but their influence is now weaker than in the past, and the usefulness of output gap estimates for real-time inflation projections is limited. Revisions to real-time output gaps also generate revisions to real-time estimates of the fiscal stance, although typically these are relatively moderate. Despite the uncertainty attached to gap estimates, they remain useful for policymakers, helping to situate current economic developments.

52 citations

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

  • ...For example, Koske and Pain (2008) stress that the bias of the revisions of output gap estimates is related to the sign of the initial estimate....

    [...]

  • ...For example, Koske and Pain (2008) stress that the bias of the revisions of output gap estimates is related to the sign of the initial estimate....

    [...]

  • ...Indeed, a number of papers have already analysed the accuracy of output gap estimates and the origin of the revisions (for instance, see Orphanides and van Norden, 2002; Koske and Pain, 2008; Marcellino and Musso, 2011; Kempkes, 2013; Turner et al, 2016)....

    [...]

  • ...Indeed, a number of papers have already analysed the accuracy of output gap estimates and the origin of the revisions (for instance, see Orphanides and van Norden, 2002; Koske and Pain, 2008; Marcellino and Musso, 2011; Kempkes, 2013; Turner et al, 2016)....

    [...]

  • ...For example, Koske and Pain (2008) stress that the bias of the revisions of output gap estimates is related to the sign of the initial estimate. Thus, if the sign of the output gap is negative, there is a higher probability of an upward revision in the future. Moreover, Turner et al (2016) fi nd that revisions of output gaps are mostly derived from revisions in potential output estimates as compared to observed output....

    [...]

Journal Article•DOI•
Employment, Wage and Price Reactions to the Crisis in Spain: Firm-Level Evidence from the WDN Survey

[...]

Mario Izquierdo1, Juan F. Jimeno2, Juan F. Jimeno1, Juan F. Jimeno3•
Bank of Spain1, Economic Policy Institute2, Institute for the Study of Labor3
01 Dec 2015-Social Science Research Network
TL;DR: The third wave of the WDN survey as mentioned in this paper showed that Spanish firms' adjustment to falling demand and other negative conditions since 2010 relied heavily on the dismissal of employees under temporary contracts, although those firms most affected by the crisis also significantly reduced permanent employment.
Abstract: This paper describes the main results from the third wave of the Wage Dynamics Network (WDN) survey. Its main goal is to provide information on demand, finance conditions and other factors determining economic activity, on wage, price and employment adjustments over the period 2010-2013, and on firms’ perceptions of institutional changes in the labour market. In Spain, the survey was conducted at the end of 2014, collecting information from a representative sample of 1,975 Spanish firms covering manufacturing, energy and market services sectors. The main results show that Spanish firms’ adjustment to falling demand and other negative conditions since 2010 relied heavily on the dismissal of employees under temporary contracts, although those firms most affected by the crisis also significantly reduced permanent employment. On the contrary, wage and hours adjustments remained limited even in those firms most severely affected by the negative shocks. Regarding institutional changes, Spanish firms perceive some easing in the conditions for economic layoffs, attributing the main source of this higher flexibility to legal changes since 2010. As to other labour conditions, including wages and hours, the share of firms perceiving higher flexibility is somewhat lower.

48 citations

Posted Content•
The fall of the labour income share in advanced economies

[...]

Angel Estrada García, Eva Valdeolivas
01 Jan 2012
TL;DR: In this article, the authors identify the most relevant determinants of the trend of the baja in diversos paises, especialmente en los desarrollados.
Abstract: espanolLa participacion de las rentas del trabajo en el PIB es un determinante clave de variables economicas muy relevantes, como la competitividad, la inflacion, la acumulacion de capital humano, la demanda y la distribucion de la renta. Los modelos economicos mas sencillos predicen que la participacion de las rentas del trabajo fluctuara en torno a un valor de equilibrio estable de largo plazo. Sin embargo, en las tres ultimas decadas se ha observado una tendencia a la baja en diversos paises, especialmente en los desarrollados. Para identificar los motivos que subyacen a esta tendencia, es necesario, en primer lugar, refinar la medicion de esta variable, teniendo en cuenta, en concreto, el empleo no asalariado, el papel desempenado por la economia no de mercado y el efecto de la reasignacion sectorial de la actividad. En segundo lugar, se contrastan distintas explicaciones teoricas, tales como el efecto de factores tecnologicos (complementariedad entre el factor capital y el empleo cualificado), del comercio internacional y de cambios en la regulacion de los mercados de producto y de trabajo, teniendo en cuenta la posicion ciclica de la economia. Este analisis revela que los factores tecnologicos parecen ser los principales determinantes de esta tendencia, y que la participacion de las rentas del trabajo es prociclica, pero se retrasa un ano respecto a las fluctuaciones de la produccion. EnglishThe labour income share is a key determinant of relevant macroeconomic variables, such as competitiveness, inflation, human capital accumulation, demand and income distribution. Simple economic models predict that the labour income share will fluctuate around a long-run value, thus implying a balanced growth path. However, in the past three decades a downward trend has been observed in various countries, especially in developed ones. To determine the sources of this trend, it is necessary, firstly, to address measurement issues, in particular the behaviour of self-employment, the role played by the non-market economy and the effect of the sectoral reallocation of activity. Then, various theoretical explanations are tested empirically, such as technological factors (capital-skill complementarity), international trade and changes in product and labour market regulations, controlling for the possible effects of the business cycle. This analysis reveals that the technological factors seem to be the most relevant determinants of the trend, and the labour income share is procyclical, but it lags one-year output movements.

45 citations

Journal Article•DOI•
Update and Re-Estimation of the Quarterly Model of Banco De España (MTBE)

[...]

Samuel Hurtado1, Pablo Manzano1, Eva Ortega1, Alberto Urtasun1•
Bank of Spain1
25 Aug 2014-Social Science Research Network
TL;DR: The Quarterly Model of Banco de Espana (MTBE) as mentioned in this paper is a large-scale macro-econometric model used for medium term macroeconomic forecasting of the Spanish economy, as well as for evaluating the staff projections and performing scenario simulations.
Abstract: The Quarterly Model of Banco de Espana (MTBE, Modelo Trimestral del Banco de Espana) is a large-scale macro-econometric model used for medium term macroeconomic forecasting of the Spanish economy, as well as for evaluating the staff projections and performing scenario simulations. The model is specified as a large set of error correction mechanism equations, and, especially in the short run, is mostly demand driven. This paper presents an update of the model, estimated with data from 1995-2012. In this new version, private productive investment and employment react more to output, capturing the higher sensitivity of these variables observed during the crisis, and prices and wages react less both to each other and to the evolution of real variables. Credit is now an endogenous variable in the model and it also helps explain the behaviour of the main demand components. As a result of all these changes, simulations now generally display a somewhat stronger demand channel and show nominal effects that are both smaller and with less inertia. The updated model describes an economy that is more reactive to financial shocks other than changes in interest rates, where wage moderation can generate growth and employment if it is followed by price moderation and where fiscal consolidation reduces public deficit and has negative but moderate effects on GDP.

44 citations

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Frequently Asked Questions (9)
Q1. what are the main conclusions from this literature?

The main conclusions from this literature are: 1) output gap estimates are subject to signifi cant revisions in terms of magnitude; 2) the real-time output gaps have a negative bias (real-time output gaps are smaller on average than fi nal estimates); 3) the revisions of output gaps are higher at cyclical turning points; 4) data revisions do not play a major role in the revisions of output gaps; 5) revisions seem to be more related to projected actual GDP numbers than to potential GDP, and the former are related to macroeconomic projections. 

since potential GDP cannot be directly observed from economic data, the European Commission infers the output gap using a production function approach (see Havik et al., 2014). 

In particular, it is often justifi ed that the lack of reliability of output gap estimates should lead to less weight being attributed to the concept of structural balances in respect of the fi scal rules that could be substituted for an expenditure rule in which the ceiling on public expenditure growth would be linked to the evolution of (past and future) GDP growth. 

The authors also show how revisions in output gaps can be decomposed into revisions in real GDP forecast errors, GDP data revisions and potential GDP, with forecast errors chiefl y responsible for the overall real-time revisions in output gaps and their cyclicality. 

The authors label as asymmetric those revisions that are positive in expansions and negative in recessions; according to this terminology, symmetric revisions would always be either positive or negative. 

In particular, inthe case of the implications for fi scal policy, on which this paper focuses, if a negative bias on real-time output gaps is confi rmed, this would imply that structural fi scal balances estimated in real time would on average be overestimated (and structural fi scal defi cits underestimated), thus providing an optimistic view of the underlying fi scal position of countries. 

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. 

Both levels and changes of output gaps can play an important role in the conduct of monetary policy as an indication of infl ationary pressures. 

revisions of output gaps estimated in real time might be due to changes in the modelling techniques employed, which could be based on new theoretical or empirical fi ndings regarding the economy under consideration.