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Filling the gap- open economy considerations for more reliable potential output estimates

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  • Zsolt Darvas
  • András Simon

Abstract

Highlights This paper argues that the Phillips curve relationship is not sufficient to trace back the output gap, because the effect of excess demand is not symmetric across tradeable and non-tradeable sectors. In the non-tradeable sector, excess demand creates excess employment and inflation via the Phillips curve, while in the tradeable sector much of the excess demand is absorbed by the trade balance. We set up an unobserved-components model...

Suggested Citation

  • Zsolt Darvas & András Simon, 2015. "Filling the gap- open economy considerations for more reliable potential output estimates," Working Papers 10401, Bruegel.
    • Handle: RePEc:bre:wpaper:10401
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    Cited by:

    1. Karsten Staehr, 2018. "Capital flows and growth dynamics in Central and Eastern Europe," Post-Communist Economies, Taylor & Francis Journals, vol. 30(1), pages 1-18, January.
    2. Marko Melolinna & Máté Tóth, 2019. "Output gaps, inflation and financial cycles in the UK," Empirical Economics, Springer, vol. 56(3), pages 1039-1070, March.
    3. Melolinna, Marko & Tóth, Máté, 2016. "Output gaps, inflation and financial cycles in the United Kingdom," Bank of England working papers 585, Bank of England.
    4. European Fiscal Board (EFB), 2019. "Assessment of EU fiscal rules with a focus on the six and two-pack legislation," Reports 2019, European Fiscal Board.
    5. Larch, Martin & Orseau, Eloïse & van der Wielen, Wouter, 2021. "Do EU fiscal rules support or hinder counter-cyclical fiscal policy?," Journal of International Money and Finance, Elsevier, vol. 112(C).
    6. Josef Baumgartner & Serguei Kaniovski & Simon Loretz & Stefan Schiman, 2018. "Wachstum schwächt sich ab. Mittelfristige Prognose der österreichischen Wirtschaft bis 2023," WIFO Monatsberichte (monthly reports), WIFO, vol. 91(10), pages 713-731, October.
    7. De Santis, Roberta & Esposito, Piero & Masi, Elena, 2017. "Are There Common Structural Determinants of Potential Output Growth in Europe?: An empirical exercise for 11 EMU countries," LEAP Working Papers 2017/4, Luiss Institute for European Analysis and Policy.
    8. Grégory Claeys & Zsolt Darvas & Alvaro Leandro, 2016. "A proposal to revive the European Fiscal Framework," Policy Contributions 13490, Bruegel.
    9. Jonas Dovern & Christopher Zuber, 2020. "Recessions and Potential Output: Disentangling Measurement Errors, Supply Shocks, and Hysteresis Effects," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(4), pages 1431-1466, October.
    10. Peter D. Williams & Mr. Yasser Abdih & Emanuel Kopp, 2020. "Reading the Stars," IMF Working Papers 2020/136, International Monetary Fund.
    11. European Fiscal Board (EFB), 2019. "2019 annual report of the European Fiscal Board," Annual reports 2019, European Fiscal Board.
    12. Zsolt Darvas, 2018. "Forecast errors and monetary policy normalisation in the euro area," Policy Contributions 28816, Bruegel.
    13. Eddie Casey, 2019. "Inside the "Upside Down": Estimating Ireland's Output Gap," The Economic and Social Review, Economic and Social Studies, vol. 50(1), pages 5-34.
    14. Roberta Santis & Piero Esposito & Elena Masi, 2019. "Structural determinants of potential output growth in Europe and the role of fiscal policy," International Economics and Economic Policy, Springer, vol. 16(4), pages 565-591, October.
    15. Michael O’Grady, 2019. "Estimating the Output, Inflation and Unemployment Gaps in Ireland using Bayesian Model Averaging," The Economic and Social Review, Economic and Social Studies, vol. 50(1), pages 35-76.
    16. Sariola, Mikko, 2019. "An unobserved components model for Finland – Estimates of potential output and NAWRU," BoF Economics Review 2/2019, Bank of Finland.
    17. Silvia Fabiani & Stefano Federico & Alberto Felettigh, 2016. "Adjusting the external adjustment: cyclical factors and the Italian current account," Questioni di Economia e Finanza (Occasional Papers) 346, Bank of Italy, Economic Research and International Relations Area.
    18. Pönkä, Harri & Sariola, Mikko, 2021. "Output gaps and cyclical indicators: Finnish evidence," BoF Economics Review 6/2021, Bank of Finland.
    19. 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.
    20. Burlon, Lorenzo & D’Imperio, Paolo, 2020. "Reliable real-time estimates of the euro-area output gap," Journal of Macroeconomics, Elsevier, vol. 64(C).

    More about this item

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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