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Uncertainty surrounding output gap estimates
The Belgian case
Igor Lebrun
Workshop on Potential Growth and Fiscal Challenges, Brussels,
27 October 2009
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Key stylized facts on output losses associated with
financial crises (1)
IMF World Economic Outlook (Sept 2009):
 Output does not recover to pre-crisis trend
 Medium-term growth rates tend to return to the pre-crisis
rate
 The output loss results from reductions in roughly equal
proportions in the employment rate, the capital-to-labour
ratio and TFP
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Key stylized facts on output losses associated with
financial crises (2)
But variation in outcomes across country experiences is
substantial:
 The higher the short-term output losses or the pre-crisis
investment share the larger the medium-term output
damage
 Macroeconomic stimulus in the short run is associated with
smaller medium-term output losses
 A favorable external environment is also generally
associated with smaller medium-term output losses
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The FPB’s medium-term spring scenario for Belgium is
consistent with these stylized facts
100
98
96
94
92
90
88
86
84
82
2006
2007
2008
2009
2010
2011
2012
2013
2014
Baseline scenario
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The FPB’s medium-term spring scenario for Belgium is
consistent with these stylized facts
100
98
96
Output loss
94
92
90
88
86
84
82
2006
2007
2008
2009
Baseline scenario
2010
2011
2012
2013
2014
Baseline scenario (2008)
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Two alternative scenarios with the same philosophy
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98
96
94
92
90
88
86
84
82
2006
2007
2008
Baseline scenario
2009
High scenario
2010
2011
Low scenario
2012
2013
2014
Baseline scenario (2008)
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Potential GDP estimates in the baseline scenario using
the EC method
100
95
90
85
80
75
70
2002
2003
2004
2005
2006
2007
GDP
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Potential GDP
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Potential GDP estimates in the baseline scenario using
the EC method
100
Revision
95
90
85
80
75
70
2002
2003
2004
2005
GDP
2006
2007
2008
2009
Potential GDP
2010
2011
2012
2013
2014
2015
2016
2017
Potential GDP (2008)
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Decomposition of these revisions by production factor
1
0
-1
-2
-3
-4
-5
-6
-7
-8
2002
2003
2004
2005
2006
Potential GDP
2007
2008
2009
2010
Total factor productivity
2011
2012
2013
Labour
2014
2015
2016
2017
Capital
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Revisions to TFP trend growth using the HP filter
2.5
1.5
0.5
-0.5
-1.5
-2.5
-3.5
2000
2002
2004
2006
Solow residuals
2008
2010
Trend
2012
2014
2016
Trend (2008)
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And to the NAIRU using the Kalman filter
16
15
14
13
12
11
10
9
1990
1992
1994
1996
1998
2000
2002
Unemployment rate (2008)
2004
2006
2008
2010
2012
2014
2016
NAIRU (2008)
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And to the NAIRU using the Kalman filter
16
15
14
13
12
11
10
9
1990
1992
1994
1996
Unemployment rate
1998
2000
NAIRU
2002
2004
2006
2008
Unemployment rate (2008)
2010
2012
2014
2016
NAIRU (2008)
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Revisions to the output gap
4
3
2
1
0
-1
-2
-3
-4
2002
2003
2004
2005
2006
2007
2008
2009 estimates
2009
2010
2011
2012
2013
2014
2015
2016
2017
2008 estimates
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Large ex post output gap revisions did happen in
the past
3
2
1
0
-1
-2
-3
1993
1994
1995
1996
1997
1998
1999
2000
2001 estimates
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Large ex post output gap revisions did happen in
the past
3
2
1
Revision
0
-1
-2
-3
1993
1994
1995
1996
2001 estimates
1997
1998
1999
2000
2004 estimates
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Our potential growth estimates resemble those of
the EC
2.5
2.0
1.5
1.0
0.5
0.0
2002
2003
2004
2005
2006
FPB
2007
2008
2009
2010
2011
2012
2013
EC
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But differ fundamentally from those of the OECD
3
2.5
2
1.5
1
0.5
0
2002
2003
2004
2005
2006
2007
2008
FPB
2009
2010
2011
2012
2013
2014
2015
2016
2017
OECD
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Potential growth and contributions
2006-2008
2009-2010
2011-2017
OECD
FPB
OECD
FPB
OECD
FPB
Potential GDP
2.5
1.8
1.8
1.2
1.0
1.6
Productivity
1.3
0.7
1.2
0.6
1.2
1.1
Employment
1.2
1.1
0.6
0.6
-0.2
0.6
Working age
population
1.0
0.9
0.9
0.6
-0.1
0.3
Participation
rate
0.2
0.2
0.1
0.2
0.1
0.2
NAIRU
0.0
0.0
-0.4
-0.2
-0.1
0.1
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With significant repercussions on the output gap
estimates
4
2
0
-2
-4
-6
-8
2002
2003
2004
2005
2006
2007
2008
FPB
2009
2010
2011
2012
2013
2014
2015
2016
2017
OECD
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Behind technical differences, contrasting views of
history?
Did we experience a “bust without a boom”?
 If yes, potential output before the outbreak of the crisis
should not be revised
 If no, potential GDP has been overestimated in the years
preceding the crisis, lulled by global disinflation
 These two contrasting views have implications on the stance
of monetary and fiscal policy before the crisis
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Implications for potential GDP computations
 Has TFP (and employment) growth been temporarily boosted
by the imbalances at the origin of the crisis?
 The method of the Commission gives an implicit “yes” to
the question
 Or shall we solely take into account the consequences of the
crisis on the supply-side conditions?
 The approach adopted by the OECD responds with a
more explicit “yes” by considering only the impact on the
capital stock and the unemployment rate
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Both approaches have their merits and limits
“Rules versus discretion”
EC method does not circumvent the problem of trend TFP and NAIRU
levels before the crisis but:
 Applying HP filter on Solow residuals may be too mechanical
 Risk that Kalman filter generates too pro-cyclical structural
unemployment rates
OECD method has more economic underpinning but:
 Some effects may be lacking
 Impact on output gap of switch from smoothed to actual capital
services series not straightforward
 NAIRU evolutions are only guided by hysteresis effects
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Conclusions (1)
Consensus among economists that the crisis is likely to have a
permanent impact on the level of potential GDP.
But great uncertainty remains regarding:
 The total amount of output loss
 The specific impact on each of the production factors
 And the precise path of the adjustment which is crucial
for potential growth and output gap estimates
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Conclusions (2)
We should bear in mind that next to the impact of the crisis,
potential GDP estimates are also influenced by other factors:
 Demographic projections
 Impact of macroeconomic policies
 Expected effects of structural reforms
 Estimating potential GDP and output gaps in real time
remains in essence a forecasting exercise!
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END
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