Working Paper

Measuring the Euro Area Output Gap

Abstract: We measure the Euro Area (EA) output gap and potential output using a non-stationary dynamic factor model estimated on a large dataset of macroeconomic and financial variables. From 2012 to 2023, we estimate that the EA economy was tighter than the European Commission and the International Monetary Fund estimate, suggesting that the slow EA growth is the result of a potential output issue, not a business cycle issue. Moreover, we find that credit indicators are crucial for pinning down the output gap, as excluding them leads to estimating a lower output gap in periods of debt build-up and a higher gap in periods of deleveraging.

Keywords: Non-stationary Approximate Dynamic Factor Model; Output gap; Potential output; Trend-Cycle Decomposition;

JEL Classification: C55; C38; C32; E32; E37;

https://doi.org/10.17016/FEDS.2024.099

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2024-12-20

Number: 2024-099