On robustness, in principle, the calculations seem reasonable, although it is surprising
that the uncertainty bands are rather wide for most countries. Less surprising is that the
real-time bands are larger than the full-sample bands. However, on this criterion, the jury
is still out until further testing with alternative methodologies (as done to some extent for
the United Kingdom). Furthermore, the capacity of this approach to capture structural
shifts is questionable, and more important, there remains an end-point problem. A
possible solution of this problem may lie in the application of the trend-cycle filter
developed by Mohr (2005) that combines an HP-filter with an unobserved-components
model-based approach.
A closely related criterion is the sensitivity to alternative budgetary parameters.
Obviously, the entire computational chain cannot be stronger than the weakest link. In
this regard, the sensitivity test conducted on the budgetary impact of various GDP
components is persuasive. And, of course, future application of this approach could be
fine-tuned to specific countries and specific periods.
As regards versatility, the results for Spain and the Netherlands give rise to some
scepticism. It would be worth probing deeper whether the narrow uncertainty bands for
Spain are attributable to some peculiar structural characteristic, model specification, or
virtual absence of statistical error. In the case of the Netherlands the estimates are
counter-intuitive in that the real-time bands are somewhat narrower than the full-sample
bands. Perhaps this is due to unusually large revisions of the underlying data.
Research on the uncertainty of real-time estimates of the output gap should be useful for
policy-making purposes. A retrospective assessment of the cyclically adjusted budgetary
position has considerable value added for fiscal policy analysis.133 Specifically, this
should provide more reliable information for national policy decisions, as well as for
surveillance by EU authorities under the Pact, especially in assessing performance under
the excess deficit procedure.
However, a pending question, to be tackled by future researchers, concerns the forward-
looking application of the estimated uncertainty around real-time output gaps. In other
words, this would involve inquiring into the extent to, and manner in, which past
estimates of uncertainty bands can be extrapolated to the period ahead with a view to
better capturing, and possibly to counteracting, the impact of cyclical fluctuations around
trend output. Beyond fiscal policy, as anticipated in my opening remarks, this line of
research is potentially useful for monetary policy as well. Estimates of the uncertainty in
real-time measures of the output gap should be helpful for the preparation of increasingly
accurate growth forecasts, including through fan charts that presuppose a reliable point
estimate for the current time period. 134
133 In a way, this is analogous to the to the analysis in Chapter 2, regarding the reaction of fiscal policy for
restoring sustainability
134 At present relatively few central banks prepare fan charts for growth along with the usual fan charts for
inflation. Among the exceptions, the Bank of England and the National Bank of Hungary publish them in
their periodic inflation reports.
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