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Finding Yeti: More robust estimates of output gap in Slovakia

Author

Listed:
  • Ludovit Odor

    (Council for Budget Responsibility)

  • Judita Jurasekova Kucserova

    (National Bank of Slovakia, Research Department)

Abstract

Estimates of potential output and the output gap are essential elements in the toolkit of policy makers. Latest changes in the European fiscal framework have strengthened significantly the role of structural budget balances, which rest on output gap calculations. With the adoption of the Fiscal Compact new procedures are entering into force. Independent fiscal institutions are going to play an important role in triggering correction mechanisms. In our view, the new framework will be credible only if meaningful estimates of output gaps and structural budget balances are available in real time. This is a huge problem especially for small countries with short history and many structural breaks, where the estimation of output gap is more an art than a science. Very volatile estimates of output gap with weak information content can quickly undermine the credibility of independent fiscal institutions. In this working paper we critically review the current estimation techniques in Slovakia and propose a new framework to calculate more robust output gap figures. In a companion paper we deal with possible improvements in the estimation of structural budget balances.

Suggested Citation

  • Ludovit Odor & Judita Jurasekova Kucserova, 2014. "Finding Yeti: More robust estimates of output gap in Slovakia," Working and Discussion Papers WP 1/2014, Research Department, National Bank of Slovakia.
    • Handle: RePEc:svk:wpaper:1027
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    References listed on IDEAS

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    1. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    2. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2013. "Is There a Trade-Off between Inflation and Output Stabilization?," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 1-31, April.
    3. Martin Larch & Alessandro Turrini, 2009. "The cyclically-adjusted budget balance in EU fiscal policy making : A love at first sight turned into a mature relationship," European Economy - Economic Papers 2008 - 2015 374, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Mr. Tetsuya Konuki, 2008. "Estimating Potential Output and the Output Gap in Slovakia," IMF Working Papers 2008/275, International Monetary Fund.
    5. Julia Lendvai & Laurent Moulin & Alessandro Turrini, 2011. "From CAB to CAAB? Correcting Indicators of Structural Fiscal Positions for Current Account Imbalances," European Economy - Economic Papers 2008 - 2015 442, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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    Citations

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    Cited by:

    1. Zuzana Mucka, 2015. "Is the Maastricht debt limit safe enough for Slovakia?," Working Papers Working Paper No. 2/2015, Council for Budget Responsibility.
    2. Kátay Gábor & Kerdelhué Lisa & Lequien Matthieu, 2020. "Semi-Structural VAR and Unobserved Components Models to Estimate Finance-Neutral Output Gap," Working papers 791, Banque de France.
    3. Miroslav Klucik, 2015. "Fiscal Adjustment in Slovakia: Findings from a Medium-Scale Econometric Model," Working Papers Working Paper No. 1/2015, Council for Budget Responsibility.
    4. Zuzana Mucka, 2019. "The mirror does not lie: Endogenous fiscal limits for Slovakia," Working Papers Working Paper No. 2/2019, Council for Budget Responsibility.
    5. Sharma, Saurabh & Behera, Harendra, 2022. "A dissection of Indian growth using a DSGE filter," Journal of Asian Economics, Elsevier, vol. 80(C).
    6. Nataliia Ostapenko, 2022. "Do output gap estimates improve inflation forecasts in Slovakia?," Working and Discussion Papers WP 4/2022, Research Department, National Bank of Slovakia.

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    More about this item

    Keywords

    output gap; real-time evaluation; fiscal policy; principal component analysis; multivariate Kalman filter;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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

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