Measuring the Euro Area Output Gap

Matteo Barigozzi, Claudio Lissona and Matteo Luciani

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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. Our results indicate that, between 2012 and 2024, the EA economy was consistently tighter than suggested by institutional estimates, implying that its weak growth reflects a potential output problem rather than a business-cycle one. Moreover, we find that the decline in trend inflation-rather than economic slack-kept core inflation below 2% before the pandemic, while demand forces explain at least 30% of the post-pandemic rise in core inflation.

Date: 2025-05, Revised 2025-11
New Economics Papers: this item is included in nep-eec and nep-mon
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http://arxiv.org/pdf/2505.05536 Latest version (application/pdf)

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Working Paper: Measuring the Euro Area Output Gap (2024)
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