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Growth accounting for the euro area: a structural approach

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  • Proietti, Tommaso
  • Musso, Alberto

Abstract

This paper is concerned with the estimation of euro area potential output growth and its decomposition according to the sources of growth. The growth accounting exercise is based on a multivariate structural time series model which combines the decomposition of total output according to the production function approach with price and wage equations that embody Phillips type relationships linking inflation and nominal wage dynamics to the output gap and cyclical unemployment, respectively. Assuming a Cobb-Douglas technology with constant returns to scale, potential output results from the combination of the trend levels of total factor productivity and factor inputs, capital and labour (hours worked), which is decomposed into labour intensity (average hours worked), the employment rate, the participation rate, and population of working age. The nominal variables (prices and wages) play an essential role in defining the trend levels of the components of potential output, as the latter should pose no inflationary pressures on prices and wages. The structural model is further extended to allow for the estimation of potential output growth and the decomposition according to the sources of growth at different horizons (long-run, medium run and short run); in particular, we propose and evaluate a model–based approach to the extraction of the low–pass component of potential output growth at different cutoff frequencies. The approach has two important advantages: the signal extraction filters have an automatic adaptation property at the boundaries of the sample period, so that the real time estimates do not suffer from what is often referred to as the ”end–of-sample bias”. Secondly, it is possible to assess the uncertainty of potential output growth estimates with different degrees of smoothness. JEL Classification: C32, C51, E32, O47

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0804.

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Date of creation: Aug 2007
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Handle: RePEc:ecb:ecbwps:20070804

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Related research

Keywords: euro area; Low-pass filters; output gap; potential output; Production function approach; Unobserved Components;

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References

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  1. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
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  4. Gomez, Victor, 2001. "The Use of Butterworth Filters for Trend and Cycle Estimation in Economic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 365-73, July.
  5. Christian Schumacher, 2008. "Measuring uncertainty of the euro area NAIRU: Monte Carlo and empirical evidence for alternative confidence intervals in a state space framework," Empirical Economics, Springer, vol. 34(2), pages 357-379, March.
  6. Koopman, S.J.M. & Shephard, N. & Doornik, J.A., 1998. "Statistical Algorithms for Models in State Space Using SsfPack 2.2," Discussion Paper 1998-141, Tilburg University, Center for Economic Research.
  7. Douglas O. Staiger & James H. Stock & Mark W. Watson, 1997. "How Precise Are Estimates of the Natural Rate of Unemployment?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 195-246 National Bureau of Economic Research, Inc.
  8. Tommaso PROIETTI & Alberto MUSSO & Thomas WESTERMANN, 2002. "Estimating Potential Output and the Output Gap for the Euro Area: a Model-Based Production Function Approach," Economics Working Papers ECO2002/09, European University Institute.
  9. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  10. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543, September.
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Citations

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Cited by:
  1. Philippe Moës, 2012. "Multivariate models with dual cycles: implications for output gap and potential growth measurement," Empirical Economics, Springer, vol. 42(3), pages 791-818, June.
  2. Vanda Almeida & Gabriela Lopes de Castro & Ricardo Mourinho Félix & Paulo Júlio & José R. Maria, 2013. "Inside PESSOA - A Detailed Description of the Model," Working Papers w201316, Banco de Portugal, Economics and Research Department.
  3. Michal Andrle, 2013. "What Is in Your Output Gap? Unified Framework & Decomposition into Observables," IMF Working Papers 13/105, International Monetary Fund.
  4. Mourinho Félix, Ricardo & Almeida, Vanda & Castro, Gabriela, 2008. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," MPRA Paper 13945, University Library of Munich, Germany.
  5. Vanda Almeida & Gabriela Lopes de Castro & Ricardo Mourinho Félix & José R. Maria, 2011. "Fiscal Consolidation in a Small Euro Area Economy," Working Papers w201105, Banco de Portugal, Economics and Research Department.
  6. Tommaso Proietti, 2008. "Structural Time Series Models for Business Cycle Analysis," CEIS Research Paper 109, Tor Vergata University, CEIS, revised 10 Jul 2008.
  7. Proietti, Tommaso, 2008. "Estimation of Common Factors under Cross-Sectional and Temporal Aggregation Constraints: Nowcasting Monthly GDP and its Main Components," MPRA Paper 6860, University Library of Munich, Germany.
  8. Gabriela Lopes de Castro & José R. Maria & Ricardo Mourinho Félix & Cláudia Braz, 2013. "Ageing and fiscal sustainability in a small euro area economy," Working Papers w201304, Banco de Portugal, Economics and Research Department.

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