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

Jakob Kapeller and Philipp Heimberger

No 50, ICAE Working Papers from Johannes Kepler University, Institute for Comprehensive Analysis of the Economy

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)
Pages: 28 pages
Date: 2016-06
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (13)

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https://www.jku.at/fileadmin/gruppen/108/ICAE_Working_Papers/wp50.pdf First version, 2016 (application/pdf)

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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