The Performativity of Potential Output: Pro-Cyclicality and Path Dependency in Coordinating European Fiscal Policies

26 Pages Posted: 1 Dec 2016

See all articles by Philipp Heimberger

Philipp Heimberger

Vienna Institute of International Economic Studies (WIIW)

Jakob Kapeller

University of Duisburg-Essen - Institute for Socio-Economics; University of Linz - Institute for Comprehensive Analysis of the Economy (ICAE)

Date Written: August 24, 2016

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

JEL Classification: E24, E61, E62, F15

Suggested Citation

Heimberger, Philipp and Kapeller, Jakob, The Performativity of Potential Output: Pro-Cyclicality and Path Dependency in Coordinating European Fiscal Policies (August 24, 2016). Institute for New Economic Thinking Working Paper Series No. 50, Available at SSRN: https://ssrn.com/abstract=2878005 or http://dx.doi.org/10.2139/ssrn.2878005

Philipp Heimberger

Vienna Institute of International Economic Studies (WIIW) ( email )

Oppolzergasse 6
A-1010 Vienna
Austria

Jakob Kapeller (Contact Author)

University of Duisburg-Essen - Institute for Socio-Economics ( email )

Lotharstraße 65
Duisburg, 47057
Germany

University of Linz - Institute for Comprehensive Analysis of the Economy (ICAE) ( email )

Freistädterstraße 315
A-4040 Linz
Austria

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