Transcript Slide 1

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
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2006
2007
2008
2009
2010
2011
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Baseline scenario
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The FPB’s medium-term spring scenario for Belgium is
consistent with these stylized facts
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Output loss
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2006
2007
2008
2009
Baseline scenario
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2012
2013
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Baseline scenario (2008)
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Two alternative scenarios with the same philosophy
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Baseline scenario
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High scenario
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Low scenario
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Baseline scenario (2008)
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Potential GDP estimates in the baseline scenario using
the EC method
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70
2002
2003
2004
2005
2006
2007
GDP
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2009
2010
2011
2012
2013
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2015
2016
2017
Potential GDP
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Potential GDP estimates in the baseline scenario using
the EC method
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Revision
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90
85
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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
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0
-1
-2
-3
-4
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2002
2003
2004
2005
2006
Potential GDP
2007
2008
2009
2010
Total factor productivity
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2013
Labour
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2016
2017
Capital
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Revisions to TFP trend growth using the HP filter
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1.5
0.5
-0.5
-1.5
-2.5
-3.5
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2002
2004
2006
Solow residuals
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2010
Trend
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2014
2016
Trend (2008)
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And to the NAIRU using the Kalman filter
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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
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9
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1992
1994
1996
Unemployment rate
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2000
NAIRU
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2004
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2008
Unemployment rate (2008)
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2012
2014
2016
NAIRU (2008)
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Revisions to the output gap
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2
1
0
-1
-2
-3
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2002
2003
2004
2005
2006
2007
2008
2009 estimates
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2011
2012
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2015
2016
2017
2008 estimates
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Large ex post output gap revisions did happen in
the past
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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
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2
1
Revision
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-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
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2008
2009
2010
2011
2012
2013
EC
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But differ fundamentally from those of the OECD
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2.5
2
1.5
1
0.5
0
2002
2003
2004
2005
2006
2007
2008
FPB
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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
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2002
2003
2004
2005
2006
2007
2008
FPB
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2010
2011
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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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