Revisions of Potential Output Estimates in the EU after the Great Recession

29 Pages Posted: 25 Jul 2019

See all articles by Jonas Dovern

Jonas Dovern

Friedrich Alexander University Erlangen Nuremberg

Christopher Zuber

German Council of Economic Experts

Date Written: 2019

Abstract

Using European Commission real-time data, we show that potential output (PO) estimates were substantially and persistently revised downwards after the Great Recession. We decompose PO revisions into revisions of the capital stock, trend labor, and trend total-factor productivity (TFP). Initially, trend TFP revisions contribute most to the overall PO revisions while all three components are almost equally important in the longer run. Revisions of the capital stock happen quickly while revisions of trend labor, mainly driven by revisions of the non-accelerating wage rate of unemployment (NAWRU), are made gradually. The relative contributions of the components to overall PO revisions differ systematically across countries. This suggests that heterogeneous policies are needed to push different countries back to their previous growth paths.

Keywords: potential output, trend, output gap, hysteresis, EC

JEL Classification: E320

Suggested Citation

Dovern, Jonas and Zuber, Christopher, Revisions of Potential Output Estimates in the EU after the Great Recession (2019). CESifo Working Paper No. 7681, Available at SSRN: https://ssrn.com/abstract=3422264 or http://dx.doi.org/10.2139/ssrn.3422264

Jonas Dovern (Contact Author)

Friedrich Alexander University Erlangen Nuremberg ( email )

Erlangen-Nuremberg
Germany

Christopher Zuber

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

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