The performativity of potential output: Pro-cyclicality and path dependency in coordinating European fiscal policies

Philipp Heimberger and Jakob Kapeller

No 50, Working Papers Series from Institute for New Economic Thinking

Abstract: This paper analyzes the performative impact of the European Commission’s model for estimating ‘potential output’, which is used as a yardstick for measuring the ‘structural budget balance’ of EU countries and, hence, is crucial for coordinating European fiscal policies. In pre-crisis years, potential output estimates amplified the build-up of private debt, housing bubbles and macroeconomic imbalances. After the financial crisis, they were revised downwards, which increased fiscal consolidation pressures. By focusing on the euro area’s economies during 1999-2014, we identify two performative aspects of the potential output model. First, the political implications of the model led to a pro-cyclical feedback loop, reinforcing general economic developments. Second, the model has contributed to national lock-ins on path dependent debt trajectories, fueling ‘structural polarization’ between core and periphery.

Keywords: performativity; potential output; path dependency; Eurozone crisis; fiscal policy; austerity. (search for similar items in EconPapers)
JEL-codes: E24 E61 E62 F15 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-08
New Economics Papers: this item is included in nep-eec, nep-mac and nep-sog
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: The performativity of potential output: pro-cyclicality and path dependency in coordinating European fiscal policies (2017)
Working Paper: The performativity of potential output: Pro-cyclicality and path dependency in coordinating European fiscal policies (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:50

DOI: 10.2139/ssrn.2878005

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