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An exploration of real-time revisions of output gap estimates across European countries

Author

Listed:
  • Pablo Hernández de Cos

    (Banco de España)

  • Aitor Lacuesta

    (Banco de España)

  • Enrique Moral-Benito

    (Banco de España)

Abstract

This document analyses real-time revisions in output gap estimates published by the European Commission for 15 countries over the period 2002-2014. We find that output gap revisions (both in levels and changes) are mainly driven by GDP growth forecast errors. Also, output gap revisions have opposite signs across expansions and recessions: real-time output gaps are downward biased (smaller than the final estimates) during expansions and upward biased (higher than the final estimates) in recessions. Our findings may have relevant implications for the conduct and assessment of fiscal policy in real time. For instance, according to our results, real-time estimates of the structural balance would be upward biased in expansions and downward biased in recessions. This implies that the fiscal stance of an economy estimated in real time would be excessively expansionary in recessions as compared to the final estimate. As a result, we argue that corrections to real-time estimates of the structural balance suggested in the literature should be contingent on the degree of slack in the economy.

Suggested Citation

  • Pablo Hernández de Cos & Aitor Lacuesta & Enrique Moral-Benito, 2016. "An exploration of real-time revisions of output gap estimates across European countries," Occasional Papers 1605, Banco de España.
    • Handle: RePEc:bde:opaper:1605
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosOcasionales/16/Fich/do1605e.pdf
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    References listed on IDEAS

    as
    1. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    2. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.
    3. 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.
    4. Gerhard Kempkes, 2014. "Cyclical Adjustment in Fiscal Rules: Some Evidence on Real-Time Bias for EU-15 Countries," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(2), pages 278-315, June.
    5. David Turner & Maria Chiara Cavalleri & Yvan Guillemette & Alexandre Kopoin & Patrice Ollivaud & Elena Rusticelli, 2016. "An investigation into improving the real-time reliability of OECD output gap estimates," OECD Economics Department Working Papers 1294, OECD Publishing.
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    Cited by:

    1. Ms. Burcu Hacibedel & Pierre Mandon & Ms. Priscilla S Muthoora & Nathalie Pouokam, 2019. "Inequality in Good and Bad Times: A Cross-Country Approach," IMF Working Papers 2019/020, International Monetary Fund.
    2. Gern, Klaus-Jürgen & Hauber, Philipp & Kooths, Stefan & Mösle, Saskia & Stolzenburg, Ulrich, 2018. "Weltkonjunktur im Herbst 2018 - Stärker differenzierte Weltkonjunktur: Gegenwind für die Schwellenländer [World Economy Autumn 2018 - Less even growth in the world economy with significant downside," Kieler Konjunkturberichte 45, Kiel Institute for the World Economy (IfW Kiel).
    3. Pablo Burriel & Víctor González-Díez & Jorge Martínez-Pagés & Enrique Moral-Benito, 2021. "Real-time analysis of the revisions to the structural position of public finances," Occasional Papers 2108, Banco de España.
    4. Gern, Klaus-Jürgen & Hauber, Philipp & Kooths, Stefan & Stolzenburg, Ulrich, 2018. "Weltkonjunktur im Sommer 2018 - Weltwirtschaft mit etwas geringerer Dynamik [World Economy Summer 2018 - Reduced world economic momentum]," Kieler Konjunkturberichte 43, Kiel Institute for the World Economy (IfW Kiel).
    5. Mr. Alvar Kangur & Koralai Kirabaeva & Jean-Marc Natal & Simon Voigts, 2019. "How Informative Are Real Time Output Gap Estimates in Europe?," IMF Working Papers 2019/200, International Monetary Fund.
    6. Constantinescu, Mihnea & Nguyen, Anh D.M., 2018. "Unemployment or credit: Which one holds the potential? Results for a small open economy with a low degree of financialization," Economic Systems, Elsevier, vol. 42(4), pages 649-664.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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