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Is there a trade-off between procyclicality and revisions in EC trend TFP estimations?

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  • Susanne Maidorn

    (Office of the Austrian Fiscal Advisory Council c/o Oesterreichsiche Nationalbank)

Abstract

Potential output constitutes a central measure to determine compliance of the member states with the EU fiscal rules. The EU uses a production function approach to estimate potential output. In a Kalman filter model together with a Bayesian approach TFP is decomposed into a trend and a cycle. The aim of this paper is to examine the relationship between two widely discussed issues of the EC estimate of potential output, procyclicality and the extent of revisions. Procyclicality of the TFP trend depends on the prior assumptions for the residual variance of the TFP cycle equation. Exploiting this, simulations over increasing values of the priors of the residual variance of the TFP cycle equation are run for eight EU countries, leading to decreasing procyclicality of TFP trend estimates. Procyclicality of the estimated TFP trend reduces the standard error of revisions for half of the countries considered, while it implies an increase for the other countries or has no effect. Thus there is a trade-off between procyclicality of the TFP trend and the revision error, but it is not so clear cut. The standard errors of revisions of real-time estimates of the TFP trend as a criterion of model selection could improve forecasts additionally to the marginal likelihood value employed by the EC.

Suggested Citation

  • Susanne Maidorn, 2018. "Is there a trade-off between procyclicality and revisions in EC trend TFP estimations?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(1), pages 59-82, February.
    • Handle: RePEc:kap:empiri:v:45:y:2018:i:1:d:10.1007_s10663-016-9346-2
    DOI: 10.1007/s10663-016-9346-2
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    4. Josef Baumgartner & Serguei Kaniovski & Hans Pitlik, 2019. "Update of the Medium-term Forecast of the Austrian Economy 2019 to 2023," WIFO Bulletin, WIFO, vol. 24(6), pages 47-56, July.
    5. Josef Baumgartner & Serguei Kaniovski & Michael Klien & Stefan Schiman, 2019. "Wirtschaftswachstum weiterhin niedrig, aber stabil. Mittelfristige Prognose der österreichischen Wirtschaft bis 2024," WIFO Monatsberichte (monthly reports), WIFO, vol. 92(10), pages 737-755, October.
    6. N. N., 2019. "WIFO-Monatsberichte, Heft 4/2019," WIFO Monatsberichte (monthly reports), WIFO, vol. 92(4), April.
    7. Josef Baumgartner & Serguei Kaniovski & Marian Fink & Hans Pitlik & Silvia Rocha-Akis, 2021. "Strong Private Consumption Spurs Economic Growth. Medium-term Forecast of the Austrian Economy 2022 to 2026 Including the Tax Reform 2022 2024," WIFO Reports on Austria, WIFO, issue 13, November.
    8. Josef Baumgartner & Serguei Kaniovski & Christian Glocker & Walter Hyll & Hans Pitlik, 2020. "COVID-19-Pandemie dämpft die Konjunkturaussichten. Mittelfristige Prognose 2021 bis 2025," WIFO Monatsberichte (monthly reports), WIFO, vol. 93(10), pages 731-753, October.
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    10. Josef Baumgartner & Serguei Kaniovski & Simon Loretz, 2022. "Energiepreisschock trübt auch mittelfristig die Wirtschaftsaussichten. Mittelfristige Prognose 2023 bis 2027," WIFO Monatsberichte (monthly reports), WIFO, vol. 95(10), pages 643-661, October.
    11. Josef Baumgartner & Serguei Kaniovski & Hans Pitlik, 2019. "Update der mittelfristigen Prognose der österreichischen Wirtschaft 2019 bis 2023," WIFO Monatsberichte (monthly reports), WIFO, vol. 92(4), pages 221-230, April.
    12. Josef Baumgartner & Serguei Kaniovski & Simon Loretz & Stefan Schiman, 2018. "Wachstum schwächt sich ab. Mittelfristige Prognose der österreichischen Wirtschaft bis 2023," WIFO Monatsberichte (monthly reports), WIFO, vol. 91(10), pages 713-731, October.
    13. Josef Baumgartner & Serguei Kaniovski & Michael Klien & Stefan Schiman, 2019. "Economic Growth Remains Low, but Stable. Medium-term Forecast of the Austrian Economy Until 2024," WIFO Bulletin, WIFO, vol. 24(12), pages 99-117, December.

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    More about this item

    Keywords

    Potential output; Procyclicality; TFP; Revisions;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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