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New Output Gap Estimates for Assessing Fiscal Policy with Lessons for Euro Area Reform

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  • Heikki Oksanen

Abstract

Output gaps (OG) identify economic cycles and the cyclical and structural components in government budget balances. A new simple method for estimating OGs is presented here. The new results are more transparent than those published by the leading economic policy institutions. - The retroactive changes to the OGs as such do not indicate that they would have been incorrect. Instead, they naturally depend on what will happen afterwards, including changes in the fiscal and other policies conducted. - Fiscal policy in the euro area was tight in 2012-13, contributing to an unexpected fall in the GDP. Fiscal policy has generally amplified cycles in the euro area, except in 2009. - Procyclicality is caused by short-sighted fiscal discipline stemming from the mistrust among the member states. Policy reforms should focus on long-term sustainability and diminishing conflicts and mistrust. The numerous reform proposals should be assessed under two key criteria: (1) reducing mistrust across the members and (2) implementation without changes to the EU Treaty. Focussing on long-term sustainability meets them both.

Suggested Citation

  • Heikki Oksanen, 2018. "New Output Gap Estimates for Assessing Fiscal Policy with Lessons for Euro Area Reform," CESifo Working Paper Series 7287, CESifo.
    • Handle: RePEc:ces:ceswps:_7287
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    1. Kieran Mc Morrow & Rafal Raciborski & Werner Roeger & Valerie Vandermeulen, 2015. "An assessment of the relative quality of the EU output gap estimates," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 14(3), pages 19-28, October.
    2. Heikki Oksanen, 2016. "Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: A Simple Proposal for Dealing with Mistrust in the Euro Area," CESifo Working Paper Series 5817, CESifo.
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    11. Roel Beetsma & Heikki Oksanen, 2008. "Pensions under Ageing Populations and the EU Stability and Growth Pact ," CESifo Economic Studies, CESifo Group, vol. 54(4), pages 563-592, December.
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    Cited by:

    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. Heikki Oksanen, 2019. "Reforming the Euro Pragmatically: Towards Sustainable Fiscal Policy and a Revamped Eurosystem," CESifo Working Paper Series 7912, CESifo.

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    More about this item

    Keywords

    euro; fiscal policy; output gaps;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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