In pre-crisis years, potential output estimates amplified the build-up of private debt, housing bubbles and macroeconomic imbalances. After the financial crisis, they were revised downwards, which increased fiscal consolidation pressures. By focusing on the euro area’s economies during 1999-2014, we identify two performative aspects of the potential output model. First, the political implications of the model led to a pro-cyclical feedback loop, reinforcing general economic developments. Second, the model has contributed to national lock-ins on path dependent debt trajectories, fueling ‘structural polarization’ between core and periphery.
The performativity of potential output: Pro-cyclicality and path dependency in coordinating European fiscal policies
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This paper analyzes the performative impact of the European Commission’s model for estimating ‘potential output’, which is used as a yardstick for measuring the ‘structural budget balance’ of EU countries and, hence, is crucial for coordinating European fiscal policies.
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- WP 50 Haimberger Kapeller (pdf, 1.16 MB)
- E2 Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
- E6 Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- E62 Fiscal Policy
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