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Growth accounting for the euro area

  • Tommaso Proietti


  • Alberto Musso


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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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 43 (2012)
Issue (Month): 1 (August)
Pages: 219-244

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Handle: RePEc:spr:empeco:v:43:y:2012:i:1:p:219-244
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  1. Tommaso Proietti, 2009. "On the Model-Based Interpretation of Filters and the Reliability of Trend-Cycle Estimates," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 186-208.
  2. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  3. Arabinda Basistha & Richard Startz, 2004. "Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach," Working Papers UWEC-2004-22, University of Washington, Department of Economics.
  4. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
  5. Siem Jan Koopman & Neil Shephard & Jurgen A. Doornik, 1999. "Statistical algorithms for models in state space using SsfPack 2.2," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 107-160.
  6. 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.
  7. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543.
  8. repec:cep:stiecm:/1998/365 is not listed on IDEAS
  9. Gourieroux, Christian & Holly, Alberto & Monfort, Alain, 1982. "Likelihood Ratio Test, Wald Test, and Kuhn-Tucker Test in Linear Models with Inequality Constraints on the Regression Parameters," Econometrica, Econometric Society, vol. 50(1), pages 63-80, January.
  10. 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.
  11. Willman, Alpo, 2002. "Euro area production function and potential output: a supply side system approach," Working Paper Series 0153, European Central Bank.
  12. Kaiser, Regina & Maravall, Agustin, 2005. "Combining filter design with model-based filtering (with an application to business-cycle estimation)," International Journal of Forecasting, Elsevier, vol. 21(4), pages 691-710.
  13. 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.
  14. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January.
  15. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  16. Tommaso Proietti, 2006. "Temporal disaggregation by state space methods: Dynamic regression methods revisited," Econometrics Journal, Royal Economic Society, vol. 9(3), pages 357-372, November.
  17. 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.
  18. 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.
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