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. Sanjeev Gupta, João Tovar Jalles, Mr. Carlos Mulas-Granados, and Michela Schena
This paper analyses the causes and consequences of fiscal consolidation promise gaps, defined as the distance between planned fiscal adjustments and actual consolidations. Using 74 consolidation episodes derived from the narrative approach in 17 advanced economies during 1978 – 2015, the paper shows that promise gaps were sizeable (about 0.3 percent of GDP per year, or 1.1 percent of GDP during an average fiscal adjustment episode). Both economic and political factors explain the gaps: for example, greater electoral proximity, stronger political cohesion and higher accountability were all associated with smaller promise gaps. Finally, governments which delivered on their fiscal consolidation plans were rewarded by financial markets and not penalized by voters.
Mr. Jesus R Gonzalez-Garcia and Mr. Gonzalo C Pastor Campos
This paper examines the usefulness of testing the conformity of macroeconomic data with Benford's law as indicator of data quality. Most of the macroeconomic data series tested conform with Benford's law. However, questions emerge on the reliability of such tests as indicators of data quality once conformity with Benford's law is contrasted with the data quality ratings included in the data module of the Reports on the Observance of Standards and Codes (data ROSCs). Furthermore, the analysis shows that rejection of Benford's law may be unrelated to the quality of statistics, and instead may result from marked structural shifts in the data series. Hence, nonconformity with Benford's law should not be interpreted as a reliable indication of poor quality in macroeconomic data.
The past two decades have seen a decline in labor's share of national income in several industrial countries. This paper analyzes the role of three factors in explaining movements in labor's share--factor-biased technological progress, openness to trade, and changes in employment protection--using a panel of 18 industrial countries over 1960-2000. Since most studies suggest that globalization and rapid technological progress (associated with accelerated information technology development) began in the mid-1980s, the sample is split in 1985 into preglobalization/pre-IT revolution and postglobalization/post-IT revolution eras. The results suggest that the decline in labor's share during the past few decades in the OECD member countries may have been largely an equilibrium, rather than a cyclical, phenomenon, as the distribution of national income between labor and capital adjusted to capital-augmenting technological progress and a more globalized world economy.
The economic restructuring and expansion after the crisis reflected a combination of private sector initiative, solid macroeconomic management, including the shift from large deficits to significant surpluses of the general government, and structural reforms. High unemployment is one indication that structural rigidities continue to hamper Finland's output potential. In the face of high unemployment and rapid population aging, the discussions focused on supporting medium-term growth while securing long-term fiscal sustainability. Reflecting concerns about slowing growth, front-loaded expenditure increases, and tax cuts were at the center of the fiscal policy debate.