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

), the impact on CAPB revisions can vary These results can help strengthen structural balance rules . For example, several countries adopted rules that contain mechanisms to correct deviations from structural balance targets once they exceed a certain threshold, including to address potential output and output gap uncertainty. Taking into account the correlation between real time growth surprises and potential GDP growth will help assessing the nature of these deviations and calibrate the need for adjustment. The case for taking into account possible changes to

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.
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

policy implications and can lead to difficulties in setting a policy that is appropriate given the true state of the economy. This topic has become particularly important for emerging markets, including many in Latin America. This is the case as, during the last decade, many of these countries have transitioned toward rule-based monetary policy frameworks. This paper revisits the issue of output gap uncertainty by analyzing properties and determinants of real-time output gap estimates from different sources for the period 1990-2014. It focuses on the changes in

Mr. Victor Gaiduch and Mr. Benjamin L Hunt

results suggest that when the output gap is missmeasured along the lines considered, it is still a very useful guide for monetary policymakers. Responding to an erroneous estimate of the output gap directly and/or indirectly through its implications for an inflation forecast results in lower inflation and output variability than responding only to the observable data on inflation and output growth. The characteristics of the computed efficient rules suggest that the optimal response to output gap uncertainty may not always be to respond less aggressively to the