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
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
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
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
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
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