IDEAS home Printed from https://ideas.repec.org/p/zbw/ifwkwp/1053.html
   My bibliography  Save this paper

Measures of the Output Gap in the Euro-Zone: An Empirical Assessment of Selected Methods

Author

Listed:
  • Döpke, Jörg
  • Chagny, Odile

Abstract

The paper discusses some widely used methods for estimating output gaps based on aggregated data for the eurozone. Though these methods exhibit some common features, an empirical comparison demonstrates that the various techniques differ substantially. In particular, the correlation of output gaps calculated with different methods is generally low, the methods imply different turning points, and the estimated level of the output gap differs greatly. Moreover, tests suggest that some of the methods commonly used have only limited information content for inflation forecasting in the euro-zone. Conclusions for business cycle analysis and economic policy are offered.

Suggested Citation

  • Döpke, Jörg & Chagny, Odile, 2001. "Measures of the Output Gap in the Euro-Zone: An Empirical Assessment of Selected Methods," Kiel Working Papers 1053, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwkwp:1053
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/17719/1/kap1053.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Mike Artis & Hans-Martin Krolzig & Juan Toro, 2004. "The European business cycle," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 1-44, January.
    3. Robert Solow, 2000. "Unemployment in the United States and in Europe - A Contrast and the Reasons," CESifo Working Paper Series 231, CESifo.
    4. David T. Coe & C. John McDermott, 1997. "Does the Gap Model Work in Asia?," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 59-80, March.
    5. Sichel, Daniel E, 1993. "Business Cycle Asymmetry: A Deeper Look," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 224-236, April.
    6. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    7. Apel, Mikael & Jansson, Per, 1999. "A theory-consistent system approach for estimating potential output and the NAIRU," Economics Letters, Elsevier, vol. 64(3), pages 271-275, September.
    8. Schumacher, Christian, 2002. "Forecasting Trend Output in the Euro Area," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 21(8), pages 543-558, December.
    9. Alasdair Scott, 2000. "Stylised facts from output gap measures," Reserve Bank of New Zealand Discussion Paper Series DP2000/07, Reserve Bank of New Zealand.
    10. Uhlig, H.F.H.V.S. & Ravn, M., 1997. "On Adjusting the H-P Filter for the Frequency of Observations," Discussion Paper 1997-50, Tilburg University, Center for Economic Research.
    11. Dupasquier, Chantal & Guay, Alain & St-Amant, Pierre, 1999. "A Survey of Alternative Methodologies for Estimating Potential Output and the Output Gap," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 577-595, July.
    12. 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.
    13. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    14. Bernd Görzig, 2000. "Neuberechnung des Produktionspotentials für Branchen des verarbeitenden Gewerbes," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 69(1), pages 90-108.
    15. Artis, Michael J & Zhang, Wenda, 1999. "Further Evidence on the International Business Cycle and the ERM: Is There a European Business Cycle?," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 120-132, January.
    16. Laurence Boone, 2000. "Comparing Semi-Structural Methods to Estimate Unobserved Variables: The HPMV and Kalman Filters Approaches," OECD Economics Department Working Papers 240, OECD Publishing.
    17. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
    18. Quah, Danny, 1992. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Econometrica, Econometric Society, vol. 60(1), pages 107-118, January.
    19. repec:spo:wpecon:info:hdl:2441/2886 is not listed on IDEAS
    20. Gebhard Flaig & Claudia Plötscher, 2000. "Estimating the Output Gap Using Business Survey Data - A Bivariate Structural Time Series Model for the German Economy," CESifo Working Paper Series 233, CESifo.
    21. Élisabeth Algava & Mathieu Plane, 2001. "Vieillissement et protection sociale. Comparaison de six pays de l'Union Européenne," Revue de l'OFCE, Presses de Sciences-Po, vol. 79(4), pages 261-314.
    22. John H. Cochrane, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 241-265.
    23. Victor Zarnowitz, 1999. "Theory and History behind Business Cycles: Are the 1990s the Onset of a Golden Age?," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 69-90, Spring.
    24. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank.
    25. Odile Chagny & Jörg Döpke & Mathieu Plane & Rainer Schmidt, 2001. "Labour Supply and Labour Force Participation in Europe – A Discussion of Some Recent Developments and Projections," Working Papers hal-03458548, HAL.
    26. Iris Claus, 2000. "Is the output gap a useful indicator of inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2000/05, Reserve Bank of New Zealand.
    27. Razzak, W., 1997. "The Hodrick-Prescott technique: A smoother versus a filter: An application to New Zealand GDP," Economics Letters, Elsevier, vol. 57(2), pages 163-168, December.
    28. Élisabeth Algava & Mathieu Plane, 2001. "Vieillissement et protection sociale. Comparaison de six pays de l'Union Européenne," Revue de l'OFCE, Presses de Sciences-Po, vol. 79(4), pages 261-314.
    29. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    30. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    31. King, Robert G. & Rebelo, Sergio T., 1993. "Low frequency filtering and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 207-231.
    32. Fayolle, J. & Micolet, P-E. & Trequattrini, L., 1999. "Long and short growth trends and cycles : an application of multivariate structural time series models to five countries," Documents de Travail de l'OFCE 1999-04, Observatoire Francais des Conjonctures Economiques (OFCE).
    33. Beyer, Andreas & Doornik, Jurgen A & Hendry, David F, 2001. "Constructing Historical Euro-Zone Data," Economic Journal, Royal Economic Society, vol. 111(469), pages 102-121, February.
    34. Gerlach, Stefan & Svensson, Lars E. O., 2003. "Money and inflation in the euro area: A case for monetary indicators?," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1649-1672, November.
    35. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
    36. Fabio Scacciavillani & Phillip Swagel, 2002. "Measures of potential output: an application to Israel," Applied Economics, Taylor & Francis Journals, vol. 34(8), pages 945-957.
    37. Gordon de Brouwer, 1998. "Estimating Output Gaps," RBA Research Discussion Papers rdp9809, Reserve Bank of Australia.
    38. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
    39. Victor Zarnowitz, 1999. "Theory and History Behind Business Cycles: Are the 1990s the Onset of a Golden Age?," NBER Working Papers 7010, National Bureau of Economic Research, Inc.
    40. Philippine Cour & Henri Sterdyniak & Hervé Le Bihan, 1997. "La croissance potentielle," Post-Print hal-03426738, HAL.
    41. Burnside, Craig, 1998. "Detrending and business cycle facts: A comment," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 513-532, May.
    42. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
    43. Artis, Michael J & Kontolemis, Zenon G & Osborn, Denise R, 1997. "Business Cycles for G7 and European Countries," The Journal of Business, University of Chicago Press, vol. 70(2), pages 249-279, April.
    44. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
    45. repec:spo:wpecon:info:hdl:2441/2246 is not listed on IDEAS
    46. Funke, Michael, 1997. "Supply potential and output gaps in West German manufacturing," International Journal of Forecasting, Elsevier, vol. 13(2), pages 211-222, June.
    47. Barrell, Ray & Sefton, James, 1995. "Output Gaps. Some evidence from the UK, France and Germany," National Institute Economic Review, Cambridge University Press, vol. 151, pages 65-73, February.
    48. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-247, July-Sept.
    49. Ms. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 1997/177, International Monetary Fund.
    50. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, number burn46-1, June.
    51. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
    52. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-368, July.
    53. John M. Roberts, "undated". "The Wage Curve and the Phillips Curve," Finance and Economics Discussion Series 1997-57, Board of Governors of the Federal Reserve System (U.S.), revised 04 Dec 2019.
    54. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388.
    55. Ms. Valerie Cerra & Ms. Sweta Chaman Saxena, 2000. "Alternative Methods of Estimating Potential Output and the Output Gap: An Application to Sweden," IMF Working Papers 2000/059, International Monetary Fund.
    56. repec:sae:niesru:v:151:y::i:1:p:65-73 is not listed on IDEAS
    57. Mark S Astley & Tony Yates, 1999. "Inflation and real disequilibria," Bank of England working papers 103, Bank of England.
    58. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
    59. W. Bolt & P.J.A. van Els, 1998. "Output gap and inflation in the EU," WO Research Memoranda (discontinued) 550, Netherlands Central Bank, Research Department.
    60. Philippine Cour & Henri Sterdyniak & Hervé Le Bihan, 1997. "La notion de croissance potentielle a-t-elle un sens ?," Post-Print hal-03428414, HAL.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cécile Denis & Kieran Mc Morrow & Werner Röger, 2002. "Production function approach to calculating potential growth and output gaps - estimates for the EU Member States and the US," European Economy - Economic Papers 2008 - 2015 176, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Zsolt Darvas & Gábor Vadas, 2003. "Univariate Potential Output Estimations for Hungary," MNB Working Papers 2003/8, Magyar Nemzeti Bank (Central Bank of Hungary).
    3. Paolo Guarda, 2002. "Potential output and the output gap in Luxembourg: some alternative methods," BCL working papers 4, Central Bank of Luxembourg.
    4. Sergey Sinelnikov-Murylev & Sergey Drobyshevsky & Maria Kazakova & Michael Alexeev, 2016. "Decomposition of Russia's GDP Growth Rates," Research Paper Series, Gaidar Institute for Economic Policy, issue 167P, pages 123-123.
    5. Mr. Andreas Billmeier, 2004. "Ghostbusting: Which Output Gap Measure Really Matters?," IMF Working Papers 2004/146, International Monetary Fund.
    6. Emilian Dobrescu, 2006. "Integration of Macroeconomic Behavioural Relationships and the Input-output Block (Romanian Modelling Experience)," EcoMod2006 272100018, EcoMod.
    7. Ahsan ul Haq Satti & Wasim Shahid Malik, 2017. "The Unreliability of Output-Gap Estimates in Real Time," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 56(3), pages 193-219.
    8. Mr. Kevin Ross & Mr. Angel J. Ubide, 2001. "Mind the Gap: What is the Best Measure of Slack in the Euro Area?," IMF Working Papers 2001/203, International Monetary Fund.
    9. S. Adnan H. A. S. Bukhari & Safdar Ullah Khan, 2008. "Estimating Output Gap for Pakistan Economy: Structural and Statistical Approaches," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 4, pages 31-60.
    10. Alain Guay & Pierre Saint-Amant, 2005. "Do the Hodrick-Prescott and Baxter-King Filters Provide a Good Approximation of Business Cycles?," Annals of Economics and Statistics, GENES, issue 77, pages 133-155.
    11. Basistha, Arabinda & Nelson, Charles R., 2007. "New measures of the output gap based on the forward-looking new Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 498-511, March.
    12. Álvarez, Luis J. & Gómez-Loscos, Ana, 2018. "A menu on output gap estimation methods," Journal of Policy Modeling, Elsevier, vol. 40(4), pages 827-850.
    13. Kieran Mc Morrow & Werner Roeger, 2001. "Potential Output: Measurement Methods, "New" Economy Influences and Scenarios for 2001-2010 - A comparison of the EU-15 and the US," European Economy - Economic Papers 2008 - 2015 150, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    14. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    15. Michaelides, Panayotis G. & Economakis, George & Milios, John G. & Maroudas, Leonidas & Aggelis, Vassilis, 2005. "Growth, Technological Change and Output Gap in Russia," MPRA Paper 74479, University Library of Munich, Germany.
    16. Iris Claus, 1999. "Estimating potential output for New Zealand: a structural VAR approach," Reserve Bank of New Zealand Discussion Paper Series DP2000/03, Reserve Bank of New Zealand.
    17. Alain Guay & Pierre St-Amant, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Technical Reports 78, Bank of Canada.
    18. Pierre St-Amant & Simon van Norden, 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
    19. Andreas Billmeier, 2006. "Measuring a Roller Coaster: Evidence on the Finnish Output Gap," Finnish Economic Papers, Finnish Economic Association, vol. 19(2), pages 69-83, Autumn.
    20. Andreas Billmeier, 2009. "Ghostbusting: which output gap really matters?," International Economics and Economic Policy, Springer, vol. 6(4), pages 391-419, December.

    More about this item

    Keywords

    Output Gap; European Monetary Union; Business Cycles;
    All these keywords.

    JEL classification:

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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:ifwkwp:1053. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/iwkiede.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/iwkiede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.