How the baby boomers' retirement wave distorts model-based output gap estimates

Maik Wolters

No 2031, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Hours per capita measures based on the private sector as usually included in the set of observables for estimating macroeconomic models are affected by low-frequent demographic trends and sectoral shifts that cannot be explained by standard models. Further, model-based output gap estimates are closely linked to the observable hours per capita series. Hence, hours per capita that are not measured in concordance with the model assumptions can distort output gap estimates. This paper shows that sectoral shifts in hours and the changing share of prime age individuals in the working-age population lead indeed to erroneous output gap dynamics. Regarding the aftermath of the global financial crisis model-based output gaps estimated using standard hours per capita series are persistently negative for the US economy. This is not caused by a permanently depressed economy, but by the retirement wave of baby boomers which lowers aggregate hours per capita. After adjusting hours for changes in the age composition to bring them in line with the model assumptions, the estimated output gap gradually closes in the years following the global financial crisis.

Keywords: output gap estimates; DSGE models; hours per capita measurement; demographic trends; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C54 E32 J11 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-age, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: How the baby boomers' retirement wave distorts model‐based output gap estimates (2018)
Working Paper: How the Baby Boomers' Retirement Wave Distorts Model-Based Output Gap Estimates (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:2031

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