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An Output Gap Measure for the Euro Area: Exploiting Country-Level and Cross-Sectional Data Heterogeneity

Manuel Gonzalez-Astudillo

No 2018-040, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: This paper proposes a methodology to estimate the euro-area output gap by taking advantage of two types of data heterogeneity. On the one hand, the method uses information on real GDP, inflation, and the unemployment rate for each member state; on the other hand, it jointly considers this information for all the euro-area countries to extract an area-wide output gap measure. The setup is an unobserved components model that theorizes a common cycle across euro-area economies in addition to country-specific cyclical components. I estimate the model with Bayesian methods using data for the 19 countries of the euro area from 2000:Q1 through 2017:Q2 and perform model comparisons across different specifications of the output trend. The estimation of the model preferred by the data indicates that, because of negative shocks to trend output during global the financial crisis, output remained slightly above potential in that period, but an output gap of about negative 3½ percent emerged during the European debt crisis. At the end of the sample period, output is estimated to be about 1 percent above potential.

Keywords: Okun's law; Output gap; Phillips curve; Unobserved components model; Euro area (search for similar items in EconPapers)
JEL-codes: C13 C32 C52 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ets and nep-mac
Date: 2018-06-22
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DOI: 10.17016/FEDS.2018.040

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