IDEAS home Printed from https://ideas.repec.org/p/euf/ecopap/0285.html
   My bibliography  Save this paper

Testing the EU fiscal surveillance: How sensitive is it to variations in output gap estimates?

Author

Listed:
  • Sven Langedijk
  • Martin Larch

Abstract

Real-time estimates of the potential output are essential in the EU fiscal surveillance framework. They are used for the calculation of the cyclically-adjusted budget balance, one of the main indicators in the assessment of the fiscal performance of EU Member States. Our paper examines whether and how different degrees of smoothness of potential output would have supported different decisions in the EU budgetary surveillance in terms of both timing and substance. The results of our simulations show that, the accuracy of the diagnostic instruments especially those that measure the risk of breaching the 3% of GDP reference value of the Treaty is surprisingly robust. Only a very high and excessive degree of smoothing of potential output would significantly reduce the reliability of the surveillance indicators. In the light of our results a somewhat higher degree of smoothing compared with the current practice would not seem to be harmful for EU fiscal surveillance. During economic upturns it would guaranty a higher degree of caution by signalling larger and possibly longer periods of economic 'good times' which would in turn warrant more fiscal consolidation.

Suggested Citation

  • Sven Langedijk & Martin Larch, 2007. "Testing the EU fiscal surveillance: How sensitive is it to variations in output gap estimates?," European Economy - Economic Papers 2008 - 2015 285, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0285
    as

    Download full text from publisher

    File URL: https://ec.europa.eu/economy_finance/publications/pages/publication9561_en.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
    2. 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.
    3. 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.
    4. André Sapir & Marco Buti, 2002. "EMU and economic policy in Europe: the challenge of the early years," ULB Institutional Repository 2013/8072, ULB -- Universite Libre de Bruxelles.
    5. Darne, Olivier & Diebolt, Claude, 2004. "Unit roots and infrequent large shocks: new international evidence on output," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1449-1465, October.
    6. Camba-Mendez, Gonzalo & Rodriguez-Palenzuela, Diego, 2003. "Assessment criteria for output gap estimates," Economic Modelling, Elsevier, vol. 20(3), pages 529-562, May.
    7. Dr. James Mitchell, 2003. "Should we be surprised by the unreliability of real-time output gap estimates? Density estimates for," National Institute of Economic and Social Research (NIESR) Discussion Papers 225, National Institute of Economic and Social Research.
    8. Bouthevillain, Carine & Cour-Thimann, Philippine & van de Dool, Gerrit & Hernández de Cos, Pablo & Langenus, Geert & Mohr, Matthias & Momigliano, Sandro & Tujula, Mika, 2001. "Cyclically adjusted budget balances: an alternative approach," Working Paper Series 77, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.
    2. Altar, Moisa & Necula, Ciprian & Bobeica, Gabriel, 2010. "Estimating The Cyclically Adjusted Budget Balance For The Romanian Economy. A Robust Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 79-99, July.
    3. Josefine Quast & Maik H. Wolters, 2022. "Reliable Real-Time Output Gap Estimates Based on a Modified Hamilton Filter," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(1), pages 152-168, January.
    4. Ley, Eduardo & Misch, Florian, 2013. "Real-time macro monitoring and fiscal policy," Policy Research Working Paper Series 6303, The World Bank.
    5. Susanne Maidorn, 2018. "Is there a trade-off between procyclicality and revisions in EC trend TFP estimations?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 45(1), pages 59-82, February.

    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. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.
    2. Cayen, Jean-Philippe & van Norden, Simon, 2005. "The reliability of Canadian output-gap estimates," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 373-393, December.
    3. António Afonso & Peter Claeys, 2006. "The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain," Working Papers Department of Economics 2006/26, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    4. Kempkes, Gerhard, 2012. "Cyclical adjustment in fiscal rules: Some evidence on real-time bias for EU-15 countries," Discussion Papers 15/2012, Deutsche Bundesbank.
    5. Troy Davig & Michael Redmond, 2014. "Accounting for changes in the U.S. budget deficit," Macro Bulletin, Federal Reserve Bank of Kansas City, pages 1-2, December.
    6. Boysen-Hogrefe, Jens, 2014. "Konjunkturbereinigung der Länder: Eine Quasi-Echtzeitanalyse am Beispiel Schleswig-Holsteins," Kiel Discussion Papers 538, Kiel Institute for the World Economy (IfW Kiel).
    7. Amable, Bruno & Azizi, Karim, 2014. "Counter-cyclical budget policy across varieties of capitalism," Structural Change and Economic Dynamics, Elsevier, vol. 30(C), pages 1-9.
    8. Dana Kloudova, 2015. "Estimating Output Gap and Potential Output for Russia and Its Usefulness by Forecasting Inflation," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 4(1), pages 45-59, March.
    9. Martin Larch & João Nogueira Martins, 2007. "Fiscal indicators - Proceedings of the the Directorate-General for Economic and Financial Affairs Workshop held on 22 September 2006 in Brussels," European Economy - Economic Papers 2008 - 2015 297, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    10. Afonso, Antonio & Claeys, Peter, 2008. "The dynamic behaviour of budget components and output," Economic Modelling, Elsevier, vol. 25(1), pages 93-117, January.
    11. Larch, Martin & Van den Noord, Paul & Jonung, Lars, 2010. "The stability and growth pact: lessons from the great recession," MPRA Paper 27900, University Library of Munich, Germany.
    12. Duarte, Cláudia & Maria, José R. & Sazedj, Sharmin, 2020. "Trends and cycles under changing economic conditions," Economic Modelling, Elsevier, vol. 92(C), pages 126-146.
    13. Reicher, Claire, 2014. "A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments?," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 184-198.
    14. Matthieu LEMOINE & Odile CHAGNY, 2005. "Estimating the potential output of the euro area with a semi-structural multivariate Hodrick-Prescott filter," Computing in Economics and Finance 2005 344, Society for Computational Economics.
    15. João Sousa Andrade & António Portugal Duarte, 2014. "Output-gaps in the PIIGS Economies: An Ingredient of a Greek Tragedy," GEMF Working Papers 2014-06, GEMF, Faculty of Economics, University of Coimbra.
    16. Morris, Richard & Reiss, Lukas, 2020. "A decomposition of structural revenue developments for euro area member states," Working Paper Series 2455, European Central Bank.
    17. Bernd Hayo & Sascha Mierzwa & Umut Unal, 2021. "Estimating Policy-Corrected Long-Term and Short-Term Tax Elasticities for the United States, Germany, and the United Kingdom," MAGKS Papers on Economics 202112, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    18. Luis Gonzalo Llosa & Shirley Miller, 2004. "Using Additional Information in Estimating the Output Gap in Peru: a Multivariate Unobserved Component Approach," Money Affairs, CEMLA, vol. 0(1), pages 57-82, January-J.
    19. Kloudová Dana, 2014. "Estimating Output Gap and Potential Output for Russia and Its Uselfulness by Forecasting Inflation," Proceedings of Economics and Finance Conferences 0402134, International Institute of Social and Economic Sciences.
    20. Marcellino, Massimiliano & Musso, Alberto, 2011. "The reliability of real-time estimates of the euro area output gap," Economic Modelling, Elsevier, vol. 28(4), pages 1842-1856, July.

    More about this item

    Keywords

    EU fiscal surveillance; potential output; output gap; Langedijk; Larch;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H6 - Public Economics - - National Budget, Deficit, and Debt

    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:euf:ecopap:0285. See general information about how to correct material in RePEc.

    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: ECFIN INFO (email available below). General contact details of provider: https://edirc.repec.org/data/dg2ecbe.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.