Potential Output, Output Gap and Fiscal Stance: is the EC estimation of the NAWRU too sensitive to be reliable?

Fioramanti, Marco (2016): Potential Output, Output Gap and Fiscal Stance: is the EC estimation of the NAWRU too sensitive to be reliable? Forthcoming in: Italian Fiscal Policy Review , Vol. 1, (2015)

Abstract

EU fiscal governance builds on the concept of Potential Output, the highest level of production an economy can sustain without incurring in inflationary pressure. Unfortunately, Potential Output is not observable and must be estimated. There are many techniques to obtain a guess value of the potential of an economy, each of which with pros and cons. The methodology adopted by the European Commission and EU Member States, while consistent with most of the recent economic and econometric theory, is still not robust enough to give a unique and irrefutable measure on which to base EU’s fiscal framework. Should the fiscal governance continue to be based on this concept, further extension of the methodology must be implemented in order to obtain more robust estimates.

• Item Type: MPRA Paper
• Language: English
• Keywords: Potential Output, Fiscal Policy, NAWRU.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

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