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Potential output measurement and structural unemployment (NAWRU) in the context of the European Union

Author

Listed:
  • Claudia Fontanari

    (Roma Tre University)

  • Riccardo Pariboni

    (DEPS, University of Siena,)

Abstract

The potential output of an economy is a key concept in the context of the EU fiscal regulation, as its estimation is used to calculate the “structural†budget balances that determine the specific fiscal policy directions of individual countries. After providing an overview of the methodologies adopted in the context of the European institutions to estimate potential output, we discuss different meanings and interpretations of the concept, which reflect different theoretical standpoints. We highlight some problems related to the mainstream explanation and the paradoxical outcome that the estimated value for the theoretical magnitude, the one that should act as an attractor for the realized one, ends up being determined, mostly, by the realized, effective variable. Finally, we elaborate on the policy implications within the EU regulatory framework that ensue from the previously discussed issues, such as the prescription of restrictive fiscal policies, to comply with European fiscal rules, even in recessions.

Suggested Citation

  • Claudia Fontanari & Riccardo Pariboni, 2022. "Potential output measurement and structural unemployment (NAWRU) in the context of the European Union," Bulletin of Political Economy, Bulletin of Political Economy, vol. 16(1), pages 57-69, June.
    • Handle: RePEc:awu:journl:v:16:y:2022:i:1:p:57-69
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    References listed on IDEAS

    as
    1. Fontanari, Claudia & Palumbo, Antonella & Salvatori, Chiara, 2020. "Potential Output in Theory and Practice: A Revision and Update of Okun's Original Method," Structural Change and Economic Dynamics, Elsevier, vol. 54(C), pages 247-266.
    2. Laurence Ball, 2014. "Long-term damage from the Great Recession in OECD countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(2), pages 149-160, September.
    3. Karel Havik & Kieran Mc Morrow & Fabrice Orlandi & Christophe Planas & Rafal Raciborski & Werner Roeger & Alessandro Rossi & Anna Thum-Thysen & Valerie Vandermeulen, 2014. "The Production Function Methodology for Calculating Potential Growth Rates & Output Gaps," European Economy - Economic Papers 2008 - 2015 535, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    potential output; NAWRU; structural budget balance; fiscal policy;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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