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An Output Gap Measure for the Euro Area : Exploiting Country-Level and Cross-Sectional Data Heterogeneity

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  • Manuel Gonzalez-Astudillo

Abstract

This paper proposes a methodology to estimate the euro-area output gap by taking advantage of two types of data heterogeneity. On the one hand, the method uses information on real GDP, inflation, and the unemployment rate for each member state; on the other hand, it jointly considers this information for all the euro-area countries to extract an area-wide output gap measure. The setup is an unobserved components model that theorizes a common cycle across euro-area economies in addition to country-specific cyclical components. I estimate the model with Bayesian methods using data for the 19 countries of the euro area from 2000:Q1 through 2017:Q2 and perform model comparisons across different specifications of the output trend. The estimation of the model preferred by the data indicates that, because of negative shocks to trend output during global the financial crisis, output remained slightly above potential in that period, but an output gap of about negative 3½ percent emerged during the European debt crisis. At the end of the sample period, output is estimated to be about 1 percent above potential.

Suggested Citation

  • Manuel Gonzalez-Astudillo, 2018. "An Output Gap Measure for the Euro Area : Exploiting Country-Level and Cross-Sectional Data Heterogeneity," Finance and Economics Discussion Series 2018-040, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2018-40
    DOI: 10.17016/FEDS.2018.040
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    File URL: https://www.federalreserve.gov/econres/feds/files/2018040pap.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Okun's law ; Output gap ; Phillips curve ; Unobserved components model ; Euro area;

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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