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The performativity of potential output: Pro-cyclicality and path dependency in coordinating European fiscal policies

Author

Listed:
  • Jakob Kapeller

    (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria)

  • Philipp Heimberger

    (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria)

Abstract

This paper analyzes the performative impact of the European Commission’s model for estimating 'potential output', which is used as a yardstick for measuring the 'structural budget balance' of EU countries and, hence, is crucial for coordinating European fiscal policies. In pre-crisis years, potential output estimates amplified the build-up of private debt, housing bubbles and macroeconomic imbalances. After the financial crisis, they were revised downwards, which increased fiscal consolidation pressures. By focusing on the euro area's economies during 1999-2014, we identify two performative aspects of the potential output model. First, the political implications of the model led to a pro- cyclical feedback loop, reinforcing general economic developments. Second, the model has contributed to national lock-ins on path dependent debt trajectories, fueling '‚structural polarization' between core and periphery.

Suggested Citation

  • Jakob Kapeller & Philipp Heimberger, 2016. "The performativity of potential output: Pro-cyclicality and path dependency in coordinating European fiscal policies," ICAE Working Papers 50, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.
    • Handle: RePEc:ico:wpaper:50
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F15 - International Economics - - Trade - - - Economic Integration

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