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

54 Pages Posted: 28 Jun 2018 Last revised: 21 Feb 2019

See all articles by Manuel González-Astudillo

Manuel González-Astudillo

Board of Governors of the Federal Reserve System; Escuela Superior Politécnica del Litoral (ESPOL) - School of Social Sciences and Humanities

Date Written: June, 2018

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 3 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 component model, Euro area

JEL Classification: C13, C32, C52, E32

Suggested Citation

González-Astudillo, Manuel, An Output Gap Measure for the Euro Area: Exploiting Country-Level and Cross-Sectional Data Heterogeneity (June, 2018). FEDS Working Paper No. 2018-40, Available at SSRN: https://ssrn.com/abstract=3203582 or http://dx.doi.org/10.17016/FEDS.2018.040

Manuel González-Astudillo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Escuela Superior Politécnica del Litoral (ESPOL) - School of Social Sciences and Humanities

Guayaquil
Ecuador

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