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How the baby boomers' retirement wave distorts model-based output gap estimates

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  • Wolters, Maik H.

Abstract

Hours per capita measures based on the private sector as usually included in the set of observables for estimating macroeconomic models are affected by low-frequent demographic trends and sectoral shifts that cannot be explained by standard models. Further, model-based output gap estimates are closely linked to the observable hours per capita series. Hence, hours per capita that are not measured in concordance with the model assumptions can distort output gap estimates. This paper shows that sectoral shifts in hours and the changing share of prime age individuals in the working-age population lead indeed to erroneous output gap dynamics. Regarding the aftermath of the global financial crisis model-based output gaps estimated using standard hours per capita series are persistently negative for the US economy. This is not caused by a permanently depressed economy, but by the retirement wave of baby boomers which lowers aggregate hours per capita. After adjusting hours for changes in the age composition to bring them in line with the model assumptions, the estimated output gap gradually closes in the years following the global financial crisis.

Suggested Citation

  • Wolters, Maik H., 2016. "How the baby boomers' retirement wave distorts model-based output gap estimates," Kiel Working Papers 2031, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:2031
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    Cited by:

    1. Jannsen, Nils & Wolters, Maik H., 2016. "Zu Produktionspotenzial und Produktionslücke in den Vereinigten Staaten," Kiel Insight 2016.2, Kiel Institute for the World Economy (IfW Kiel).
    2. Elstner, Steffen & Feld, Lars P. & Schmidt, Christoph M., 2018. "The German productivity paradox: Facts and explanations," Ruhr Economic Papers 767, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Yasuo Hirose & Takeki Sunakawa, 2023. "The Natural Rate of Interest in a Non-linear DSGE Model," International Journal of Central Banking, International Journal of Central Banking, vol. 19(1), pages 301-340, March.
    4. Fair, Ray C., 2020. "Variable mismeasurement in a class of DSGE models: Comment," Journal of Macroeconomics, Elsevier, vol. 66(C).
    5. Josefine Quast & Maik H. Wolters, 2022. "Reliable Real-Time Output Gap Estimates Based on a Modified Hamilton Filter," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(1), pages 152-168, January.

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    More about this item

    Keywords

    output gap estimates; DSGE models; hours per capita measurement; demographic trends; Bayesian estimation;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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