The Information Content of Capacity Utilisation Rates for Output Gap Estimates Michael Graff and Jan-Egbert Sturm 28 September 2010
Overview � Introduction and motivation � Data � Output gap data: OECD Economic Outlook � Capacity utilisation: information from Business Tendency Surveys � Empirical analysis � Design � Results � Conclusions 6th Colloquium 28 September 2010 2
Real-time data Vintage Final data Evaluation Final data Partly revised First-released Final Partly revised First-released Time Economic forecast Political decisions 6th Colloquium 28 September 2010 3
Measurement of the output gap in real time � Output gap = (Y – Y*)/Y* ≈ y – y* • Percentage deviation of factual output from potential output • Potential and factual output are unobservable in real time • This is when this information is most needed as a guidance for economic and monetary policy • Countercyclical fiscal policy • E.g. Swiss “debt brake” • Monetary policy in a Taylor rule framework 6th Colloquium 28 September 2010 4
Measurement of the output gap in real time � Problems with real-time estimates of output gap data � End-point problem when estimating Y* � Revisions in Y (and thereby Y*) � Orphanides & Van Norden (2002) � Revisions are of similar magnitude as the gap itself • Hence, shortcomings question usefulness of output gap data in real time • How can we improve the quality of output gap estimates in real time? • Various remedies suggested • Forecasting data points • Multivariate filters • Use of dynamic factor models • … • This paper: output gap ↔ capacity utilisation from BTS 6th Colloquium 28 September 2010 5
Some methods to estimate potential output � Smoothing real GDP using a filters � Hodrick-Prescott, Baxter-King, … � The “split time trend” method � calculate average output growth during each cycle, where the cycle is defined as the period between peaks in economic growth � Estimating potential output using a production function approach � y = a + α n + (1 – α ) k + e – e is smoothed (using HP filter) to e* (trend factor productivity) � y* = a + α n* + (1 – α ) k + e* – Where n* is potential employment calculated using an estimated non-accelerating wage rate of unemployment 6th Colloquium 28 September 2010 6
Output gap data: OECD Economic Outlook � Production function based approach � Bi-annual vintages with data at a annual frequency � First vintage: Jun. 1995 (data covers 1970-1996) � Last vintage: Dec. 2009 (data covers 1970-2011) � The resulting revision-data sets are unbalanced � Annual data: 22 countries (up to 287 obs.) � The largest balanced panels thereof are � Annual data: 17 countries, 1996-2005 (= 170 obs.) 6th Colloquium 28 September 2010 7
Capacity utilisation data � Sources: European Commission, OECD MEI, KOF, national sources (in case of Belgium, US, New Zealand and Canada) � Business tendency survey data � Question used asks for: The current level of capacity utilisation – Refers mainly to means of production (physical capital) – Is consistently asked in the industry sector – Range • Minimum: completely idle = 0 % • Maximum: full utilisation of present capacity = 100 % - Few surveys allow for “excess” capacity utilisation > 100% � Data is (almost) not revised over time 6th Colloquium 28 September 2010 8
BTS: Direct measurement of capacity utilisation 6th Colloquium 28 September 2010 9
Output gap Capacity utilisation (vintages) (reference period) Summary of the data Australia 1995:Jun–2009:Dec 1996q1-2009q4 Austria 1995:Jun–2009:Dec 1996q1-2009q4 � Countries in bold are not included Belgium 1995:Jun–2009:Dec 1980q1-2009q4 in the strictly balanced sample Czech Republic 2005:Dec–2009:Dec 1993q2-2009q4 Denmark 1995:Jun–2009:Dec 1987q1-2009q4 Finland 1995:Jun–2009:Dec 1993q1-2009q4 France 1995:Jun–2009:Dec 1985q1-2009q4 Germany 1995:Jun–2009:Dec 1985q1-2009q4 Hungary 2005:Dec–2009:Dec 1996q1-2009q4 Ireland 1995:Jun–2009:Dec 1985q1-2008q2 Italy 1995:Jun–2009:Dec 1970q1-2009q4 Japan 1995:Jun–2009:Dec 1978q1-2009q4 Luxemburg 2005:Dec–2009:Dec 1985q1-2009q4 Netherlands 1995:Jun–2009:Dec 1985q1-2009q4 New Zealand 1997:Jun–2009:Dec 1970q1-2009q4 Norway 1995:Jun–2009:Dec 1987q1-2009q4 Poland 2006:Dec–2009:Dec 1992q2-2009q4 Portugal 1995:Jun–2009:Dec 1987q1-2009q4 Spain 1995:Jun–2009:Dec 1987q2-2009q4 Sweden 1995:Jun–2009:Dec 1996q1-2009q4 Switzerland 1995:Jun–2009:Dec 1970q1-2009q4 United Kingdom 1995:Jun–2009:Dec 1985q1-2009q4 6th Colloquium 28 September 2010 10 No. countries 22 22
Data setup and revision process: Annual data Vintages / Release Dates 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec 1970 … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … 1991 R8 1992 R6 R7 R8 1993 R4 R5 R6 R7 R8 1994 R2 R3 R4 R5 R6 R7 R8 1995 F4 R1 R2 R3 R4 R5 R6 R7 R8 1996 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 Reference Period 1997 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 1998 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 1999 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 2000 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 2001 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 2002 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 2003 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 2004 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 2005 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 2006 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 2007 F1 F2 F3 F4 R1 R2 R3 R4 2008 F1 F2 F3 F4 R1 R2 2009 F1 F2 F3 F4 2010 F1 F2 Fx Forecast number x Rx Release number x 6th Colloquium 28 September 2010 11 Source: OECD, calculations KOF
Releases of annual output gaps: averaged bal.panel % of potential GDP CU rate (in %) 2.0 83.5 1.5 83.0 1.0 82.5 0.5 82.0 0.0 81.5 -0.5 81.0 -1.0 80.5 -1.5 80.0 -2.0 79.5 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 rel. 1 rel. 2 rel. 3 rel. 4 rel. 5 rel. 6 rel. 7 rel. 8 CU rate 6th Colloquium 28 September 2010 12 Source: OECD, calculations KOF
Revision process of annual output gaps: avg.bal.panel %-points CU rate (in %) 2.0 83.5 1.5 82.5 1.0 81.5 0.5 80.5 0.0 79.5 -0.5 78.5 -1.0 77.5 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 rev. 1 rev. 2 rev. 3 rev. 4 rev. 5 rev. 6 rev. 7 CU rate 6th Colloquium 28 September 2010 13 Source: OECD, calculations KOF
Descriptive Statistics of the annual releases/vintages Maximum panel Strictly balanced panel (22 countries, 1995-2009) (17 countries, 1996-2005) Obs Mean St.D. Min. Max. Obs Mean St.D. Min. Max. Capacity utilisation (in % of full capacity) degree (in %) 353 81.51 4.40 64.54 92.30 170 81.43 2.97 74.43 87.53 Output gap (in % of potential GDP) Release 1 287 -0.93 1.98 -8.79 5.50 170 -0.79 1.58 -4.86 5.50 Release 2 283 -0.55 1.65 -5.73 5.68 170 -0.64 1.58 -4.27 5.68 Release 3 287 -0.40 1.75 -5.50 6.39 170 -0.53 1.64 -4.31 6.39 Release 4 283 -0.46 1.90 -7.31 6.41 170 -0.46 1.62 -4.06 6.41 Release 5 287 -0.38 1.97 -7.32 7.66 170 -0.38 1.65 -4.53 7.66 Release 6 283 -0.51 1.90 -9.54 6.77 170 -0.28 1.59 -3.16 6.77 Release 7 287 -0.48 1.96 -9.54 6.84 170 -0.24 1.64 -5.11 6.84 Release 8 283 -0.52 2.02 -9.66 6.83 170 -0.13 1.67 -4.17 6.83 6th Colloquium 28 September 2010 14
Descriptive statistics: Annual data Obs. Mean Sign. St.Dev. Min. Max. Skewness Kurtosis Jarque-Bera Sign. Maximum panel Revision 1 265 0.19 0.00 0.71 -2.90 3.06 0.09 4.44 218.09 0.00 Cumulative Revision 2 265 0.37 0.00 0.94 -2.46 3.98 0.33 1.68 36.10 0.00 Cumulative Revision 3 243 0.53 0.00 1.18 -2.51 6.83 1.27 3.97 225.36 0.00 Cumulative Revision 4 243 0.64 0.00 1.29 -3.55 6.86 0.76 2.57 90.20 0.00 Cumulative Revision 5 221 0.64 0.00 1.24 -3.99 6.14 0.49 2.38 61.01 0.00 Cumulative Revision 6 221 0.68 0.00 1.27 -3.71 5.83 0.29 1.26 17.70 0.00 Cumulative Revision 7 199 0.65 0.00 1.20 -3.95 3.90 -0.11 0.66 4.03 0.13 Strictly balanced panel Revision 1 170 0.15 0.00 0.63 -2.42 3.06 1.12 5.13 222.31 0.00 Cumulative Revision 2 170 0.26 0.00 0.86 -2.43 3.77 0.28 1.91 28.06 0.00 Cumulative Revision 3 170 0.33 0.00 1.01 -2.51 4.61 0.74 2.39 56.18 0.00 Cumulative Revision 4 170 0.41 0.00 1.12 -3.55 3.81 -0.02 0.80 4.58 0.10 Cumulative Revision 5 170 0.52 0.00 1.14 -3.99 4.28 0.02 1.53 16.58 0.00 Cumulative Revision 6 170 0.56 0.00 1.21 -3.71 4.01 -0.01 0.88 5.50 0.06 Cumulative Revision 7 170 0.66 0.00 1.24 -3.95 3.90 -0.15 0.59 3.11 0.21 6th Colloquium 28 September 2010 15
Histogram total revisions using annual data .4 .3 Density .2 .1 0 -4 -2 0 2 4 Cumulative Revision 7 6th Colloquium 28 September 2010 16
Correlation coefficients between revisions 1 2 3 4 5 6 7 Revision 1 1.00 -0.18 0.14 -0.23 -0.04 -0.13 -0.08 Revision 2 1.00 -0.12 -0.06 -0.08 -0.09 -0.04 Revision 3 1.00 -0.01 -0.01 -0.07 -0.10 Revision 4 1.00 -0.17 -0.05 -0.05 Revision 5 1.00 -0.05 0.06 Revision 6 1.00 -0.12 Revision 7 1.00 6th Colloquium 28 September 2010 17
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