IDEAS home Printed from https://ideas.repec.org/a/rjr/romjef/vy2021i4p5-38.html
   My bibliography  Save this article

Potential Output: A Market Conditionalities Interpretation

Author

Listed:
  • Emilian DOBRESCU

    (Centre for Macroeconomic Modelling, NIER, Romanian Academy.)

Abstract

The measurement of potential output has been addressed in economics from the supplyand demand-side perspectives. The purpose of this study was to deepen the latter interpretation, focusing on market conditionalities and providing a macro-model (EUMOD21) as a computational tool. This empirical research was conducted using the statistical databases of the European Union (EU) for the period 1996–2019. The potential output estimations obtained with the proposed methodology are compared with those computed by the EU-DGFIN using the production function method (close to the supply-side vision). Both sets of estimates are grounded in the same socio-economic background. However, they differ due to the inherent temporary misalignments between the supply-side and demandside market impulses and to possible measurement discrepancies. None of these estimations appear to be optimal, and they may be looked at as Marshallian scissors. The true potential output seems to be linked to both perspectives and should be approximated by taking both of them into account. Quantitatively, this may be obtained by adopting different averaging algorithms.

Suggested Citation

  • Emilian DOBRESCU, 2021. "Potential Output: A Market Conditionalities Interpretation," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-38, December.
  • Handle: RePEc:rjr:romjef:v::y:2021:i:4:p:5-38
    as

    Download full text from publisher

    File URL: https://www.ipe.ro/rjef/rjef4_2021/rjef4_2021p5-38.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
    2. Zarnowitz, Victor, 1985. "Recent Work on Business Cycles in Historical Perspective: A Review of Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 23(2), pages 523-580, June.
    3. Zsolt Darvas & Gábor Vadas, 2003. "Univariate Potential Output Estimations for Hungary," MNB Working Papers 2003/8, Magyar Nemzeti Bank (Central Bank of Hungary).
    4. Andrzej Nowak & Jørgen Vitting Andersen & Wojciech Borkowski, 2015. "Dynamics of Socio-Economic Systems: Attractors, Rationality and Meaning," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01215581, HAL.
    5. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    6. Eric Dubois, 2016. "Political business cycles 40 years after Nordhaus," Public Choice, Springer, vol. 166(1), pages 235-259, January.
    7. ., 2021. "Europe takes the technology lead: the case of Citron," Chapters, in: Sustainable Consumption, Production and Supply Chain Management, chapter 11, pages 62-68, Edward Elgar Publishing.
    8. Mark Leonard & Jeremy Shapiro & Jean Pisani-Ferry & Simone Tagliapietra & Guntram B. Wolff, 2021. "The geopolitics of the European Green Deal," Policy Contributions 40941, Bruegel.
    9. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01291401, HAL.
    10. Mark Hallerberg & Lúcio Vinhas de Souza & William Roberts Clark, 2002. "Political Business Cycles in EU Accession Countries," European Union Politics, , vol. 3(2), pages 231-250, June.
    11. Juan J. Dolado & Miguel Sebastián & Javier Vallés, 1993. "Ciclical patterns of the spanish economy," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 445-473, September.
    12. Saman, Corina & Pauna, Bianca, 2013. "New Keynesian Phillips Curve for Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 159-171, June.
    13. Alberto Alesina & Nouriel Roubini, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 663-688.
    14. Nicolas Véron, 2021. "Brexit and European Finance: Prolonged Limbo," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 22(05), pages 33-36, September.
    15. Szilárd Benk & Zoltán M. Jakab & Gábor Vadas, 2005. "Potential Output Estimations for Hungary: A Survey of Different Approaches," MNB Occasional Papers 2005/43, Magyar Nemzeti Bank (Central Bank of Hungary).
    16. Pilar Cuadrado & Enrique Moral-Benito, 2016. "Potential growth of the spanish economy," Occasional Papers 1603, Banco de España.
    17. William D. Nordhaus, 1989. "Alternative Approaches to the Political Business Cycle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(2), pages 1-68.
    18. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-888, September.
    19. Creel, Michael & Farell, Montserrat, 1996. "SUR estimation of multiple time-series models with heteroscedasticity and serial correlation of unknown form," Economics Letters, Elsevier, vol. 53(3), pages 239-245, December.
    20. David N. F. Bell & David G. Blanchflower, 2021. "Underemployment in the United States and Europe," ILR Review, Cornell University, ILR School, vol. 74(1), pages 56-94, January.
    21. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    22. Shi, Min & Svensson, Jakob, 2006. "Political budget cycles: Do they differ across countries and why?," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1367-1389, September.
    23. Gian Luigi Mazzi & Frédéric Reynès & Matthieu Lemoine & Paola Veroni, 2008. "Real Time Estimation of Potential Output and Output Gap for the Euro-Area : Comparing Production Function with Unobserved Components and SVAR Approaches," Working Papers hal-01027422, HAL.
    24. Nowak, Andrzej & Andersen, Jorgen & Borkowski, Wojciech, 2015. "Dynamics of Socio-Economic Systems: Attractors, Rationality and Meaning," Review of Behavioral Economics, now publishers, vol. 2(1-2), pages 167-173, July.
    25. Toke Aidt & Zareh Asatryan & Lusine Badalyan & Friedrich Heinemann, 2020. "Vote Buying or (Political) Business (Cycles) as Usual?," The Review of Economics and Statistics, MIT Press, vol. 102(3), pages 409-425, July.
    26. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 1-16.
    27. Müller, Karsten, 2019. "Electoral cycles in macroprudential regulation," ESRB Working Paper Series 106, European Systemic Risk Board.
    28. Ms. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 1997/177, International Monetary Fund.
    29. Andrzej Nowak & Jørgen Vitting Andersen & Wojciech Borkowski, 2015. "Dynamics of Socio-Economic systems: attractors, rationality and meaning," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01242298, HAL.
    30. Jula, Dorin, 2008. "Economic Impact of Political Cycles – The Relevance of European experinces for Romania," Working Papers of Institute for Economic Forecasting 081101, Institute for Economic Forecasting.
    31. repec:hal:wpspec:info:hdl:2441/7349 is not listed on IDEAS
    32. Emilian DOBRESCU, 2020. "Self-fulfillment degree of economic expectations within an integrated space: The European Union case study," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-32, December.
    33. Moisa, Altar & Necula, Ciprian & Bobeica, Gabriel, 2010. "Estimating Potential GDP for the Romanian Economy. An Eclectic Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 5-25, September.
    34. Huiwen Lai & Eric C. Y. Ng, 2020. "On business cycle forecasting," Frontiers of Business Research in China, Springer, vol. 14(1), pages 1-26, December.
    35. Khemani, Stuti, 2004. "Political cycles in a developing economy: effect of elections in the Indian States," Journal of Development Economics, Elsevier, vol. 73(1), pages 125-154, February.
    36. Ellen R. McGrattan & Edward C. Prescott, 2014. "A Reassessment of Real Business Cycle Theory," American Economic Review, American Economic Association, vol. 104(5), pages 177-182, May.
    37. Martinez, Leonardo, 2009. "A theory of political cycles," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1166-1186, May.
    38. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Post-Print hal-01291401, HAL.
    39. Cécile Denis & Kieran Mc Morrow & Werner Röger, 2002. "Production function approach to calculating potential growth and output gaps - estimates for the EU Member States and the US," European Economy - Economic Papers 2008 - 2015 176, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    40. repec:hal:spmain:info:hdl:2441/7349 is not listed on IDEAS
    41. N. Apergis & A. Rezitis, 2003. "Housing prices and macroeconomic factors in Greece: prospects within the EMU," Applied Economics Letters, Taylor & Francis Journals, vol. 10(12), pages 799-804.
    42. Dana Kloudová, 2016. "Does Using Nairu In The Production Function Influence Estimation Of Potential Output And Output Gap?," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 5(2), pages 1-21, June.
    43. Jeroen J. L. Candel & Sebastian Lakner & Guy Pe’er, 2021. "Europe’s reformed agricultural policy disappoints," Nature, Nature, vol. 595(7869), pages 650-650, July.
    44. Karel Havik & Kieran Mc Morrow & Fabrice Orlandi & Christophe Planas & Rafal Raciborski & Werner Roeger & Alessandro Rossi & Anna Thum-Thysen & Valerie Vandermeulen, 2014. "The Production Function Methodology for Calculating Potential Growth Rates & Output Gaps," European Economy - Economic Papers 2008 - 2015 535, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    45. Marco Leonardi & Filippo Mazzotti, 2021. "SURE. A European Success Story in the Pandemic," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 129(1), pages 37-44.
    46. Andrzej Nowak & Jørgen Vitting Andersen & Wojciech Borkowski, 2015. "Dynamics of Socio-Economic systems: attractors, rationality and meaning," Post-Print halshs-01242298, HAL.
    47. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 10(Fall), pages 23-27.
    48. Andrzej Nowak & Jørgen Vitting Andersen & Wojciech Borkowski, 2015. "Dynamics of Socio-Economic Systems: Attractors, Rationality and Meaning," Post-Print hal-01215581, HAL.
    49. Marsh, Michael, 1998. "Testing the Second-Order Election Model after Four European Elections," British Journal of Political Science, Cambridge University Press, vol. 28(4), pages 591-607, October.
    50. Mr. Natan P. Epstein & Corrado Macchiarelli, 2010. "Estimating Poland's Potential Output: A Production Function Approach," IMF Working Papers 2010/015, International Monetary Fund.
    51. Nicholas Apergis, 2003. "Housing Prices and Macroeconomic Factors: Prospects within the European Monetary Union," International Real Estate Review, Global Social Science Institute, vol. 6(1), pages 63-74.
    52. Yigal Menashe & Yossi Yakhin, 2004. "Mind the Gap: Structural and Nonstructural Approaches to Estimating Israel's Output Gap," Israel Economic Review, Bank of Israel, vol. 2(2), pages 79-106.
    53. , Aisdl, 2020. "Expand business and operations overseas: Aussifresh Report," OSF Preprints srgz5, Center for Open Science.
    54. Andrzej Nowak & Jørgen Vitting Andersen & Wojciech Borkowski, 2015. "Dynamics of Socio-Economic systems: attractors, rationality and meaning," Documents de travail du Centre d'Economie de la Sorbonne 15077, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    55. Nicholas Apergis, 2003. "Housing Prices and Macroeconomic Factors: Prospects within the European Monetary Union," International Real Estate Review, Asian Real Estate Society, vol. 6(1), pages 63-47.
    56. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
    57. Spiegel, Alisa & Slijper, Thomas & de Mey, Yann & Meuwissen, Miranda P.M. & Poortvliet, P. Marijn & Rommel, Jens & Hansson, Helena & Vigani, Mauro & Soriano, Bárbara & Wauters, Erwin & Appel, Franzisk, 2021. "Resilience capacities as perceived by European farmers," Agricultural Systems, Elsevier, vol. 193(C).
    58. Han Li, 2020. "Business Strategy and R&D Expenditures," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 144-154, July.
    59. Waltraud Schelkle & Dorothee Bohle, 2021. "European political economy of finance and financialization," Review of International Political Economy, Taylor & Francis Journals, vol. 28(4), pages 761-774, July.
    60. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
    61. Agustín Maravall & Ana del Río, 2001. "Time Aggregation and the Hodrick-Prescott Filter," Working Papers 0108, Banco de España.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antoine Cazals & Pierre Mandon, 2016. "Political Budget Cycles: Manipulation from Leaders or Manipulation from Researchers? Evidence from a Meta-Regression Analysis," Working Papers halshs-01320586, HAL.
    2. Antoine CAZALS & Pierre MANDON, 2016. "Political Budget Cycles: Manipulation from Leaders or Manipulation from Researchers? Evidence from a Meta-Regression Analysis," Working Papers 201609, CERDI.
    3. Can Sever & Emekcan Yucel, 2021. "Electoral Cycles in Inequality Abstract:," Working Papers 2021/01, Bogazici University, Department of Economics.
    4. Linda G. Veiga & Georgios Efthyvoulou & Atsuyoshi Morozumi, 2018. "Political Budget Cycles: Conditioning Factors and New Evidence," NIPE Working Papers 21/2018, NIPE - Universidade do Minho.
    5. Andrew Q. Philips, 2016. "Seeing the forest through the trees: a meta-analysis of political budget cycles," Public Choice, Springer, vol. 168(3), pages 313-341, September.
    6. Sever, Can & Yücel, Emekcan, 2022. "The effects of elections on macroprudential policy," Journal of Comparative Economics, Elsevier, vol. 50(2), pages 507-533.
    7. Clemens Fuest & Klaus Gründler & Niklas Potrafke & Fabian Ruthardt, 2021. "Read My Lips? Taxes and Elections," EconPol Working Paper 71, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    8. García, Israel & Hayo, Bernd, 2021. "Political budget cycles revisited: Testing the signalling process," European Journal of Political Economy, Elsevier, vol. 69(C).
    9. Mahambare, Vidya & Dhanaraj, Sowmya & Mittal, Pragati, 2022. "The political budget cycles in the presence of a fiscal rule: The case of farm debt waivers in India," Journal of Policy Modeling, Elsevier, vol. 44(3), pages 701-721.
    10. Dirk Foremny & Ronny Freier & Marc-Daniel Moessinger & Mustafa Yeter, 2018. "Overlapping political budget cycles," Public Choice, Springer, vol. 177(1), pages 1-27, October.
    11. Potrafke, Niklas, 2019. "Electoral cycles in perceived corruption: International empirical evidence," Journal of Comparative Economics, Elsevier, vol. 47(1), pages 215-224.
    12. Maravall, A. & del Rio, A., 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 975-998, October.
    13. Klomp, Jeroen, 2023. "Political budget cycles in military expenditures: A meta-analysis," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 1083-1102.
    14. Ziogas, Thanasis & Panagiotidis, Theodore, 2021. "Revisiting the political economy of fiscal adjustments," Journal of International Money and Finance, Elsevier, vol. 111(C).
    15. Florian Haelg & Niklas Potrafke & Jan-Egbert Sturm, 2022. "The determinants of social expenditures in OECD countries," Public Choice, Springer, vol. 193(3), pages 233-261, December.
    16. Eric Dubois, 2016. "Political Business Cycles 40 Years after Nordhaus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01291401, HAL.
    17. Kayode Taiwo & Linda G. Veiga, 2020. "Is there an “invisible hand” in the formula-based intergovernmental transfers in Nigeria?," NIPE Working Papers 02/2020, NIPE - Universidade do Minho.
    18. Potrafke, Niklas, 2020. "General or central government? Empirical evidence on political cycles in budget composition using new data for OECD countries," European Journal of Political Economy, Elsevier, vol. 63(C).
    19. Baldi, Guido & Forster, Stephan, 2019. "Political Budget Cycles: Evidence from Swiss Cantons," EconStor Preprints 195930, ZBW - Leibniz Information Centre for Economics.
    20. Isadora Sánchez-Torné & Macarena Pérez-Suárez & Juan Carlos Morán-Álvarez, 2020. "Una comparativa de la innovación de Espana y Rusia: ¿políticas bilaterales para la innovación?," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 12(1), pages 201-233, June.

    More about this item

    Keywords

    production function; market conditionalities; potential output;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rjr:romjef:v::y:2021:i:4:p:5-38. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Corina Saman (email available below). General contact details of provider: https://edirc.repec.org/data/ipacaro.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.