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Potential output and EU fiscal surveillance

Marco Buti, Nicolas Carnot, Atanas Hristov, Kieran Mc Morrow , Werner Roeger and Valerie Vandermeulen, (2019), “Potential output and EU fiscal surveillance”, VoxEU, 23 September

Criticisms have recently been raised on the usefulness of the EU’s commonly agreed methodology for estimating potential output and output gaps. Whilst mindful of the uncertainty which inevitably surrounds an unobservable variable such as potential output, this column argues that much of the criticism is both conceptually and empirically inaccurate, as well as being neglectful of the plausibility of the EU’s potential output estimates compared to other business cycle indicators. In addition, many of the criticisms focus to an excessive degree on the role of potential output in EU fiscal surveillance, with the practice of surveillance being much more flexible and less rigid than many commentators tend to suggest.

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