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Measuring the Euro Area Output Gap

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Abstract

We measure the Euro Area (EA) output gap and potential output using a non-stationary dynamic factor model estimated on a large dataset of macroeconomic and financial variables. From 2012 to 2023, we estimate that the EA economy was tighter than the European Commission and the International Monetary Fund estimate, suggesting that the slow EA growth is the result of a potential output issue, not a business cycle issue. Moreover, we find that credit indicators are crucial for pinning down the output gap, as excluding them leads to estimating a lower output gap in periods of debt build-up and a higher gap in periods of deleveraging.

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  • Matteo Barigozzi & Claudio Lissona & Matteo Luciani, 2024. "Measuring the Euro Area Output Gap," Finance and Economics Discussion Series 2024-099, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-99
    DOI: 10.17016/FEDS.2024.099
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    File URL: https://www.federalreserve.gov/econres/feds/files/2024099pap.pdf
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    Keywords

    Non-stationary Approximate Dynamic Factor Model; Output gap; Potential output; Trend-Cycle Decomposition;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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