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Economy and Finance

Output gap calculation method (EUCAM)

With the technical support of the Directorate General for Economic and Financial Affairs (DG ECFIN), the EU’s Output Gap Working Group (OGWG) has been responsible, over the last 20 years, for the development of the EU’s Commonly Agreed Methodology...

EUCAM aims to ensure scientifically robust and transparent potential output and output gap estimations, for the period up to T+10.

Potential output and the output gap are key metrics for policy makers to assess the cyclical position and productive capacity of the EU and Euro Area economies.

EUCAM plays an important role in the European Union’s (EU’s) fiscal surveillance framework by influencing the calculation of cyclically adjusted budget balances – it is used as a measure of the fiscal effort by Member States in reaching their medium-term budgetary objectives; through its use in the expenditure benchmark in the preventive arm of the Stability and Growth Pact; and by providing key inputs for the EU’s work on ageing and fiscal sustainability.

EUCAM is an economics based, production function, methodology (i.e. a Solow growth model with a Cobb-Douglas production function which assumes constant returns to scale; a factor price elasticity equal to one; and factor elasticities equal to their factor shares). The preference for an economic, as opposed to a statistical, approach was driven by a number of considerations :

  1. One gains the possibility of examining the underlying economic factors which are driving any observed changes in the potential output indicator and consequently the opportunity of establishing a meaningful link between policy reform measures with actual outcomes. 
  2. It highlights the close relationship between the potential output and NAWRU concepts, given that the production function approach requires estimates to be provided of "normal" or equilibrium rates of unemployment.
  3. It facilitates the making of forecasts / scenarios of future growth prospects by making explicit assumptions on the future evolution of demographic, institutional and technological trends. 

EUCAM Bibliography

  • Blondeau, F., Planas, C. and A. Rossi (2021), Output Gap Estimation using the European Union’s Commonly Agreed Methodology, ECFIN Discussion Paper 148.
  • Buti, M., N. Carnot., A. Hristov., K McMorrow., W. Roeger and V Vandermeulen (2019), “Potential output and EU fiscal surveillance”, VoxEU.org, September.
  • Croitorov, O., Pfeiffer, P., Ratto, M. and W. Roeger (2020), Output Gap and Inflation with Persistent Demand Shocks, mimeo.
  • D'Auria, F., Denis, C., Havik, K., Mc Morrow, K., Planas, C., Raciborski, R., Roeger, W. and A. Rossi (2010), "The production function methodology for calculating potential growth rates and output gaps", ECFIN Economic Paper, No. 420, European Commission.
  • Denis,C., Mc Morrow, K. and W. Roeger (2002), "Production function approach to calculating potential growth and output gaps – estimates for the EU Member States and the US", Economic Papers 176, European Commission.
  • Denis,C., Grenouilleau, D., Mc Morrow, K. and W. Roeger (2006), "Calculating potential growth rates and output gaps – a revised production function approach", Economic Papers 247, European Commission.
  • European Commission (2009) “Impact of the current economic and financial crisis on potential output”, Occasional Papers 49.
  • European Commission (2019) “European Economic Forecast. Autumn 2019 – The Procyclicality of Potential Output” Institutional Paper 115.
  • Havik, K., McMorrow, K., Orlandi, F., Planas, C., Raciborski, R., Roeger, W., Rossi, A., Thum-Thysen A., and Vandermeulen, V. (2014) “The Production Function Methodology for Calculating Potential Growth Rates and Output Gaps” European Economy Economic Papers 535, November 2014.
  • Hristov, A and W. Roeger, 2020. "The natural rate of unemployment and its institutional determinants," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Hristov, A., C. Planas, W. Roeger and A. Rossi (2017), ‘NAWRU Estimation Using Structural Labour Market Indicators’, European Economy Discussion Papers, No 069, European Commission
  • Hristov, A (2022), "Labour Effort and the European Wage Phillips Curve", (Forthcoming).
  • Hristov, A. and A. Thum-Thysen (2022), "Measuring Labour Hoarding with Existing Firm-Level Survey Data", (Forthcoming).
  • Hristov, A. and W. Roeger (2017), “On Econometrics with a Human Face and Business Cycles: A Reply to Fioramanti and Waldmann's Criticism on the EU’s NAWRU Methodology”, ECFIN Economic Brief 22
  • Hristov, A., Raciborski, R., and V. Vandermeulen (2017), Assessment of the Plausibility of the Output Gap Estimates, ECFIN Economic Brief 23 
  • Mc Morrow, K., Roeger, W., Vandermeulen, V & K. Havik, (2015), "An assessment of the relative quality of the Output Gap estimates produced by the EU's Production Function Methodology", ECFIN Discussion Paper 20.
  • Mc Morrow, K., Roeger, and V, Vandermeulen (2017), “Evaluating Medium Term Forecasting Methods and their Implications for EU Output Gap Calculations”, Discussion Paper 070.
  • Mc Morrow, K., Blondeau, F., D’Auria, F., Döhring, B., Hristov, A., Maier, C., and A. Thum-Thysen, (2021), “Output gaps, potential output and the Covid-19 crisis: Policymaking under uncertainty”, VoxEU.org, December
  • Orlandi, F. (2012), Structural unemployment and its determinants in the EU countries, European Economy Economic Paper, No 455, DG ECFIN, European Commission, May 2012.
  • Planas, C, Roeger, W & Rossi A (2010), "Does Capacity Utilisation help estimating the TFP cycle ?", European Economy, Economic Papers 410.
  • Roeger W, K McMorrow, A Hristov and V Vandermeulen (2019), “The current debate on output gaps and cyclical indicators”, European Economy Discussion Papers, July.
  • Thum-Thysen, A, F Blondeau, F d’Auria, B Döhring, A Hristov and K McMorrow (2022), “Potential output and output gaps against the backdrop of the COVID-19 pandemic”, Quarterly Report on the Euro Area, (Institutional Paper 172).
  • Vandermeulen, V and W. Roeger (2021), “Trend Capital when Goods and Capital Market Frictions Exist”, ECFIN Discussion Paper 145