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Mr. Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, and Simon Voigts

Front Matter Page European Department Contents ABSTRACT I. INTRODUCTION II. ESTIMATION METHODS AND DESIRABLE PROPERTIES A. Estimation Methods B. Properties of Output Gap Estimates III. OUTPUT GAP ESTIMATES THROUGH WEO VINTAGES A. Definitions B. Properties of WEO Real-Time Output Gap Estimates C. Real-Time Estimates for Other Advanced Economies IV. EXPLAINING THE NEGATIVE BIAS IN REAL-TIME OUTPUT GAPS A. Decomposing the Real-Time Output Gap Bias B. Data Revisions C. Forecast Accuracy E. The Role of Judgment F

Mr. Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, and Simon Voigts
We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.
Mr. Alvar Kangur, Koralai Kirabaeva, Jean-Marc Natal, and Simon Voigts

changes in business cycles and inflation, while final or real time inflation is the best predictor of future inflation. The rest of the paper is structured as follows. Section 2 reviews the most common methods to estimate the output gap and their key properties. Section 3 presents key stylized facts showing the persistent and often large negative bias in WEO real time output gap estimates for the countries in the euro area, while section 4 decomposes the output gap bias, attributing most of it to judgment and forecast errors. Section 5 looks at the role of

International Monetary Fund. Strategy, Policy, & and Review Department
A careful review has revealed significant scope to modernize and better align the MAC DSA with its objectives and the IMF’s lending framework. This note proposes replacing the current framework with a new methodology based on risk assessments at three different horizons. Extensive testing has shown that the proposed framework has much better predictive accuracy than the current one. In addition to predicting sovereign stress, the framework can be used to derive statements about debt stabilization under current policies and about debt sustainability.
International Monetary Fund. Strategy, Policy, & Review Department
This note provides operational guidance for the use of the Sovereign Risk and Debt Sustainability Framework (SRDSF), which replaces the Debt Sustainability Framework for Market Access Countries. The SRDSF introduces improvements in organization, methodology, transparency, and communication when analyzing public debt issues in countries that mainly finance themselves with market-based debt. After its phased adoption beginning [June 2022], it will become the Fund’s principal tool for assessing public debt sustainability.
International Monetary Fund. Strategy, Policy, & and Review Department

A careful review has revealed significant scope to modernize and better align the MAC DSA with its objectives and the IMF’s lending framework. This note proposes replacing the current framework with a new methodology based on risk assessments at three different horizons. Extensive testing has shown that the proposed framework has much better predictive accuracy than the current one. In addition to predicting sovereign stress, the framework can be used to derive statements about debt stabilization under current policies and about debt sustainability.

International Monetary Fund. Strategy, Policy, & Review Department

Information from Past Projections Source: IMF. Note: This figure shows a sign of potential at a 5-year horizon represented by the bright red cell. 1/ Calculated as the percentile rank of the country’s output gap revisions (defined as the difference between real time/period ahead estimates). 37. A second tool calculates output gap revisions from historical data and assesses optimism in potential output projections ( Figure 9.B ). It is based on Kangur et al (2019) and staff analyses showing the existence of real-time output gap biases for a majority of market