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The euro-area output gap through the lens of a DSGE model

Author

Listed:
  • Lorenzo Burlon

    () (Bank of Italy)

  • Paolo D'Imperio

    () (Sapienza University of Rome)

Abstract

The paper provides estimates of the euro-area output gap, based on a relatively standard medium scale DSGE model estimated recursively with Bayesian techniques over the period 1985-2016. The main findings can be summarized as follows. First, our measure of output gap identifies episodes of expansion and recession generally in line with the official business cycle dating of the CEPR. Second, unlike measures of output gap obtained by means of statistical filtering techniques, real-time DSGE-based estimates are remarkably stable and hence are less prone to ex-post revisions. According to our results, the euro-area output gap was -3.4% in 2016, more negative than assessed by most economic analysts and institutions (spanning a range between from 0 and to -2%), but arguably more consistent with the still weak dynamics of both labour costs and core inflation.

Suggested Citation

  • Lorenzo Burlon & Paolo D'Imperio, 2019. "The euro-area output gap through the lens of a DSGE model," Questioni di Economia e Finanza (Occasional Papers) 477, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_477_19
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/qef/2019-0477/QEF_477_19.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    output gap; potential output; DSGE modelling; Bayesian estimation; euro area;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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