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Estimating the Euro Area output gap using multivariate information and addressing the COVID-19 pandemic

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  • Morley, James
  • Palenzuela, Diego Rodriguez
  • Sun, Yiqiao
  • Wong, Benjamin

Abstract

We estimate the euro area output gap by applying the Beveridge-Nelson decomposition based on a large Bayesian vector autoregression. Our approach incorporates multivariate information through the inclusion of a wide range of variables in the analysis and addresses data issues associated with the COVID-19 pandemic. The estimated output gap lines up well with the CEPR chronology of the business cycle for the euro area and we find that hours worked, more than the unemployment rate, provides the key source of information about labor utilization in the economy, especially in pinning down the depth of the output gap during the COVID-19 recession when the unemployment rate rose only moderately. Our findings suggest that labor market adjustments to the business cycle in the euro area occur more through the intensive, rather than extensive, margin. JEL Classification: C18, E17, E32

Suggested Citation

  • Morley, James & Palenzuela, Diego Rodriguez & Sun, Yiqiao & Wong, Benjamin, 2022. "Estimating the Euro Area output gap using multivariate information and addressing the COVID-19 pandemic," Working Paper Series 2716, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222716
    Note: 2759141
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    Cited by:

    1. Camilo Granados & Daniel Parra-Amado, 2023. "Estimating the Output Gap After COVID: How to Address Unprecedented Macroeconomic Variations," Borradores de Economia 1249, Banco de la Republica de Colombia.
    2. Tino Berger & Lorenzo Pozzi, 2023. "Cyclical consumption," Tinbergen Institute Discussion Papers 23-064/VI, Tinbergen Institute.
    3. Haderer, Michaela, 2022. "An Estimated DSGE Model of the Euro Area with Expectations about the Timing and Nature of Liftoff from the Lower Bound," Working Papers 2022-05, University of Sydney, School of Economics.

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    More about this item

    Keywords

    Bayesian estimation; Beveridge-Nelson decomposition; multivariate information; output gap;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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