## How Informative Are Real Time Output Gap Estimates in Europe?

_IMF Working Papers, September 20, 2019_

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## Bibliographic details
- Authors: Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, Simon Voigts
- Published: September 20, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513512549.001

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### Key findings
- Study period: 1994-2017.
- Staff typically saw economies as operating below their potential.
- In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages.
- Most of the mis-measurement in real time can be explained by:
  - the difficulty in predicting recessions, and
  - overestimation of the economy’s potential capacity.
- Real-time output gaps are not useful for predicting inflation (finding consistent with earlier literature).
- Countries where slack (and potential growth) is overestimated to a larger extent tend to have:
  - lower primary fiscal balances, and
  - higher public debt ratios that increase faster than projected.
- Previous research suggests national authorities’ real-time output gaps suffer from a similar bias.
- Policy implication: To the extent real-time output gap estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.

### Methods and scope
- Subject areas: Fiscal policy, Fiscal stance, Inflation, Output gap, Potential output, Prices, Production.
- Keywords: Business Cycles, debt buildup, Europe, Fiscal Policy, Fiscal stance, Inflation, mean output gap property, Monetary Policy, Output gap, output gap bias, output gap estimate, output gap revision, Potential Output, real-time estimate, real-time output gaps, WP.
- Publication type: IMF Working Papers.
- Authors: Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, Simon Voigts.
- Publication date: September 20, 2019.
- Pages: 42.

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_Source: https://www.imf.org/en/publications/wp/issues/2019/09/20/how-informative-are-real-time-output-gap-estimates-in-europe-48645_