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Mr. Francesco Grigoli, Alexander Herman, Mr. Andrew J Swiston, and Gabriel Di Bella

country’s position in the business cycle at the time of the initial estimate. Section IV illustrates the policy implications of output gap uncertainty on five Latin American economies that have operated with inflation targeting schemes during the last decade. Section V concludes. II. Output Gap Revisions This section examines the statistical properties of output gap estimates and their revisions, in order to evaluate the degree of confidence that can be attached to initial assessments of an economy’s cyclical position. A. Output Gap Definition and Data

Mr. Francesco Grigoli, Alexander Herman, Mr. Andrew J Swiston, and Gabriel Di Bella
Output gap estimates are subject to a wide range of uncertainty owing to data revisions and the difficulty in distinguishing between cycle and trend in real time. This is important given the central role in monetary policy of assessments of economic activity relative to capacity. We show that country desks tend to overestimate economic slack, especially during recessions, and that uncertainty in initial output gap estimates persists several years. Only a small share of output gap revisions is predictable ex ante based on characteristics like output dynamics, data quality, and policy frameworks. We also show that for a group of Latin American inflation targeters the prescriptions from typical monetary policy rules are subject to large changes due to output gap revisions. These revisions explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.
Mr. Francesco Grigoli, Alexander Herman, Mr. Andrew J Swiston, and Gabriel Di Bella

Front Matter Page Western Hemisphere Department Contents Abstract I. Introduction II. Output Gap Revisions A. Output Gap Definition and Data B. Initial Estimates and Revisions C. Robustness Checks III. Determinants of Output Gap Revisions A. Empirical Strategy B. Results IV. Policy Implications A. To Ease, or to Tighten? B. Setting Monetary Policy in Real Time C. Monetary Reaction Functions D. Output Gap Revisions and Policy Revisions E. Output Gap Revisions and Inflation V. Summary and Conclusions

Eugen Tereanu, Ms. Anita Tuladhar, and Mr. Alejandro Simone

Front Matter Page European Department Table of Contents I. Introduction II. Literature Review III. Evaluating Fiscal Effort: The Impact of Output Gap Revisions A. Data and Methodology B. The Magnitude of Output Gap Revisions and Implications for the Measurement of CAPB IV. Fiscal Policy Implications V. Conclusion and Policy Implications References Appendices 1. Methodology for Decomposing the Revision to the CAPB 2. The Size and Distribution of Revisions to Output and Potential Output Over Alternative Horizons 3. Estimating

Michal Andrle

news effect and a decomposition of output gap revisions into relevant observables. The illustration focuses 2007Q2 and 2009Q1, both being interesting periods with respect to the ‘Great Recession’. The results are depicted in Fig. 5 . As can be seen, the revision properties of the model are quite favourable. A news effect is defined as a projection error, and thus it can be easily quantified and decomposed into components. The data arriving in 2009Q1 resulted into a further deepening of the output gap estimate. The drop in the output gap was a complete news, as the

Eugen Tereanu, Ms. Anita Tuladhar, and Mr. Alejandro Simone

has changed infrequently as a result of output gap revisions, the magnitudes of output gap revisions have been significant on average. They averaged about 1½ percent of potential GDP in absolute terms between the time when budget assumptions were made and when the outturn data was first evaluated. Revisions during non-crisis years were also sizable, averaging almost 1 percent of potential GDP. Fiscal effort estimates as measured by the cyclically-adjusted primary balance (CAPB) were also revised substantially . Potential GDP contributed significantly to these

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

order to close the output gap in the medium-term actual output has to be forecasted to grow rapidly to catch up with potential. As a result, the growth forecast errors can be significant contributors to the output gap revisions. Drawing from the IMF-WEO database, we show that systematic upward revisions to real-time output gaps are positively correlated with both public debt levels and public debt WEO forecast errors in the main countries of the euro area. Similarly, there is a robust, and negative, empirical association between primary fiscal balances and

Eugen Tereanu, Ms. Anita Tuladhar, and Mr. Alejandro Simone
Potential output estimation plays a crucial role in conducting fiscal policy based on structural balances. Difficulties in estimating potential output could lead to an erroneous policy stance with a consequent impact on growth. This paper analyzes historical data on revisions of actual and potential growth in the European Union and the implication of these revisions for the measurement of fiscal effort using the cyclically-adjusted primary balance (CAPB). It finds that revisions in output gap estimates were large, at almost 1½ percent of potential GDP on average. Revisions in potential GDP also contributed significantly to revisions in the estimated CAPB, especially during the crisis years. Given these findings and historical correlations, it proposes an indicative rule of thumb for reducing errors in the measurement of fiscal effort by factoring in that about 30 percent of revisions in actual growth capture changes in potential growth. In other words, the standard advice of “letting automatic stabilizers operate fully” in response to a positive/negative growth shocks likely implies a strengthening/weakening of the structural position.