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Jelle Barkema, Tryggvi Gudmundsson, and Mr. Mico Mrkaic

related concept of NAIRU for the US and argues that it remains a helpful variable despite the large uncertainty in its estimation. Smets (2002) looks at output gap measurement errors and their effect on monetary policy rules. He finds that output gap uncertainty can have a significant effect on optimal monetary policy responses. On the methodological front, Hamilton (2018) presents a forceful critique of the HP filter. In another line of criticism, Coibon et al (2018) argue that real-time estimates of potential output respond similarly to transitory and permanent

Jelle Barkema, Tryggvi Gudmundsson, and Mr. Mico Mrkaic
Estimates of output gaps continue to play a key role in assessments of the stance of business cycles. This paper uses three approaches to examine the historical record of output gap measurements and their use in surveillance within the IMF. Firstly, the historical record of global output gap estimates shows a firm negative skew, in line with previous regional studies, as well as frequent historical revisions to output gap estimates. Secondly, when looking at the co-movement of output gap estimates and realized measures of slack, a positive, but limited, association is found between the two. Thirdly, text analysis techniques are deployed to assess how estimates of output gaps are used in Fund surveillance. The results reveal no strong bearing of output gap estimates on the coverage of the concept or direction of policy advice. The results suggest the need for continued caution in relying on output gaps for real-time policymaking and policy assessment.
Luc Eyraud and Mr. Tao Wu
The paper contributes to the discussions on fiscal governance in Europe. It takes stock of recent reforms, identifies areas for further progress, and discusses a menu of policy options for the medium-term. The issues covered include: (i) the growing complexity of the European framework and ways to simplify it; (ii) the difficulties to measure and implement structural stance indicators; (iii) the challenge of reconciling fiscal sustainability and growth; (iv) the need to enhance coordination in the area of monitoring; and (v) the obstacles to compliance and proposals to strengthen enforcement.
Luc Eyraud and Mr. Tao Wu

imperfectly filters out asset and commodity price cycles, it is still more “accurate” than the nominal balance, which does not extract these factors at all. In addition, the output gap measurement error is usually lower than the “noise” created by the cyclical component of the nominal balance. 27 Table 2 shows that, if the nominal balance is used to measure the underlying fiscal position, the error is about 25 percent higher than with the real-time structural balance (whether or not Estonia and Latvia are included in the sample). The discrepancy is particularly large at

Luc Eyraud and Tao Wu

asset and commodity price cycles, it is still more “accurate” than the nominal balance, which does not extract these factors at all. In addition, the output measurement error is usually significantly lower than the “noise” created by the cyclical component of the nominal balance. An empirical analysis shows that, if the nominal balance is used to measure the underlying fiscal position, the error is about 25 percent higher than with the real-time structural balance. The gap is particularly large at the peaks and troughs of the cycle. Finally, the output gap measurement

International Monetary Fund

. Presumably, the “loss function” for output gap measurement errors depends on whether the scale of existing automatic stabilizers is ideal, on the sensitivity of output to changes in the fiscal balance, and on adjustment costs associated with fiscal policy shifts in general. 22 Thus the methodology does not attempt to extract temporary revenue components related to cycles in the volume of copper production, or to effects of price fluctuations on copper export volume (or possible effects of the volume of Chilean production on world copper prices). Moreover, the

International Monetary Fund
This paper presents four studies on selected issues of the Chilean economy. The new framework for fiscal policy represented by the authorities' target of a central government structural surplus of 1 percent of GDP is also discussed. This study examines whether the variance of the cyclical component of output in Chile and 11 other countries increased during the 1990s, a period during which the variance of inflation declined. The alternative measures of potential output for Chile are also estimated.