“Estimation of potential GDP and the output gap: analysis of a number of critical issues” is the title of Working Paper 1/2015 by Marco Fioramanti (ISTAT), Flavio Padrini (PBO) and Corrado Pollastri (PBO) and published by the PBO. The paper explores in depth an issue of great importance for the governance system for the public finances of the European Union, namely the methodologies for estimating potential output and the output gap. More specifically, the paper focuses on the production function approach used by the Commission and by Member State governmental authorities, with an emphasis on the estimation of potential GDP for Italy. First, the paper discusses “real time” estimates of potential GDP and the output gap made by the Commission starting from 2002, tracking the revisions made over time. The paper then turns to a discussion of the main characteristics of the production function method used by the Commission, comparing it with that used by the OECD. The estimations of potential GDP for Italy, published in the Autumn 2014 forecasts of the Commission, the OECD and the IMF are compared in light of the differences in the methodologies employed. The paper concludes with a closer look at NAWRU, in particular the sensitivity of the estimation of NAWRU for Italy with respect to a number of assumptions concerning the parameters of the statistical filters used in its calculation.
