A Systemic Approach to Estimating the Output Gap for the Italian Economy

Tommaso Proietti, Marco Fioramanti, Cecilia Frale () and Libero Monteforte
Additional contact information
Cecilia Frale: Parliamentary Budget Office

Comparative Economic Studies, 2020, vol. 62, issue 3, No 6, 465-493

Abstract: Abstract Estimating potential output and the corresponding output gap plays a key role, not only for inflation forecasting and the assessment of the economic cycle, but also for the fiscal governance of the European Union (EU). Potential output is, however, an unobservable and extremely uncertain variable. Empirical measurements differ considerably depending on the econometric approach adopted, the specification of the data generating process and the dataset used. The method adopted at the EU level, which was agreed within the Output Gap Working Group, has been subject to considerable debate. The fiscal councils of the various Member States contribute to the discussion over the output gap modelling. This paper aims at estimating the potential output of the Italian economy, using a combination of five different models proposed by the relevant literature. More specifically, in addition to a statistical filter, we use unobserved components models based on the Phillips curve, the Okun law and the production function. The approach adopted allows to reconcile the parsimony of the econometric specification with the economic interpretation of the results. Estimates of the output gap obtained with the five selected models present important properties: low pro-cyclicity, stability with respect to the preliminary data and consistency with the economic theory. The use of multiple models also enables the construction of confidence bands for the output gap estimates, which are helpful for policy analysis. In the empirical application for Italy, estimates and forecasts of the output gap recently produced by relevant organisations tend to fall within the confidence interval calculated on the basis of the five selected models.

Keywords: Potential output; Unobserved components; Phillips curve; Inflation forecasts; Reliability; C32; E32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1057/s41294-020-00127-y Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:compes:v:62:y:2020:i:3:d:10.1057_s41294-020-00127-y

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/41294/PS2

DOI: 10.1057/s41294-020-00127-y

Access Statistics for this article

Comparative Economic Studies is currently edited by Nauro Campos

More articles in Comparative Economic Studies from Palgrave Macmillan, Association for Comparative Economic Studies Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().