Estimating the euro area output gap using multivariate information and addressing the COVID-19 pandemic

James Morley, Diego Rodríguez-Palenzuela, Yiqiao Sun, Benjamin Wong

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We estimate the euro area output gap by applying the Beveridge–Nelson decomposition based on a large Bayesian vector autoregression. Our approach incorporates multivariate information through the inclusion of a wide range of variables in the analysis and addresses data issues associated with the COVID-19 pandemic. The estimated output gap lines up well with the CEPR chronology of the business cycle for the euro area and we find that hours worked, more than the unemployment rate, provides the key source of information about labor utilization in the economy, especially in pinning down the depth of the output gap during the COVID-19 recession when the unemployment rate rose only moderately. Our findings confirm that labor market adjustments to the business cycle in the euro area occur more through the intensive, rather than extensive, margin.

Original languageEnglish
Article number104385
Number of pages21
JournalEuropean Economic Review
Volume153
DOIs
Publication statusPublished - 2023

Keywords

  • Beveridge–Nelson decomposition
  • Multivariate information
  • Output gap

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