The Information Content of Capacity Utilisation Rates for Output Gap Estimates Michael Graff and Jan-Egbert Sturm 15 November 2010
Overview Introduction and motivation Data Output gap data: OECD Economic Outlook Capacity utilisation: information from Business Tendency Surveys Empirical analysis Design Results Conclusions 15 November 2010 2
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 15 November 2010 3
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 15 November 2010 4
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 15 November 2010 5
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.) 15 November 2010 6
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 15 November 2010 7
Output gap (vintages) Capacity utilisation (reference period) Australia 1995:Jun 2009:Dec 1996q1-2009q4 Austria 1995:Jun 2009:Dec 1996q1-2009q4 Belgium 1995:Jun 2009:Dec 1980q1-2009q4 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 Summary of the data Countries in bold are not included in the strictly balanced sample No. countries 22 22 15 November 2010 8
Data setup and revision process Reference Period 1970 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 R8 R6 R7 R8 R4 R5 R6 R7 R8 R2 R3 R4 R5 R6 R7 R8 F4 F2 R1 F3 R2 F4 R3 R1 R4 R2 R5 R3 R6 R4 R7 R5 R8 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 R7 R8 F1 F2 F3 F4 R1 R2 R3 R4 R5 R6 F1 F2 F3 F4 R1 R2 R3 R4 F1 F2 F3 F4 R1 R2 F1 F2 F3 F4 F1 F2 Fx Rx Forecast number x Release number x Source: OECD, calculations KOF 15 November 2010 9
Releases of annual output gaps: averaged bal.panel 2.0 % of potential GDP CU rate (in %) 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 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 79.5 Source: OECD, calculations KOF 15 November 2010 10
Revision process of annual output gaps: avg.bal.panel 2.0 %-points CU rate (in %) 83.5 1.5 82.5 1.0 81.5 0.5 80.5 0.0 79.5-0.5 78.5-1.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 77.5 rev. 1 rev. 2 rev. 3 rev. 4 rev. 5 rev. 6 rev. 7 CU rate Source: OECD, calculations KOF 15 November 2010 11
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 15 November 2010 12
Descriptive statistics 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 15 November 2010 13
Estimation design Data revisions contain news revisions are orthogonal to earlier releases and not predictable y Rx (t) = y R1 (t) + ε(t), cov(y R1 (t),ε(t)) = 0 Rx = R2, R3, R4, R5, R6, R7, R8 Mincer-Zarnowitz (1969) test for forecast efficiency (in a panel data set-up) Are real time output gap estimates informationally efficient (w.r.t. Capacity Utilisation data) Are the revisions predictable? Δ Rx-R1 y(t) = α(i) + γ y R1 (i,t) + δ CU(i,t) + β(t) + ε(i,t) Δ Rx-R1 y(t) represent the cumulative revisions 1 to 7 Hypotheses: α(i) = 0, γ = 0, δ = 0 15 November 2010 14
Regression results using increasing revision horizons (1) (2) (3) (4) (5) (6) (7) Dependent variable: R 2 -R 1 R 3 -R 1 R 4 -R 1 R 5 -R 1 R 6 -R 1 R 7 -R 1 R 8 -R 1 First release (y R 1 ) Capacity utilisation rate -0.22-0.35-0.48-0.55-0.59-0.54-0.47 (-3.74) (-6.13) (-8.00) (-6.69) (-7.35) (-6.25) (-5.63) 0.06 0.13 0.17 0.19 0.23 0.16 0.16 (1.53) (2.50) (2.44) (2.66) (3.29) (1.99) (2.19) Adjusted R 2 0.19 0.26 0.32 0.37 0.47 0.45 0.49 Number of observations 170 170 170 170 170 170 170 Number of countries 17 17 17 17 17 17 17 Number of periods 10 10 10 10 10 10 10 p-value LR-test for country effects 0.05 0.09 0.00 0.00 0.00 0.00 0.00 p-value LR-test for time effects 0.00 0.00 0.00 0.00 0.00 0.00 0.00 p-value LR-test for time and country effects 0.00 0.00 0.00 0.00 0.00 0.00 0.00 15 November 2010 15
Goodness-of-fit across different revisions 0.50 adj.r2 0.45 0.40 0.35 0.30 0.25 0.20 0.15 Revision 1 Cumulative Revision 2 Cumulative Revision 3 Cumulative Revision 4 Cumulative Revision 5 Cumulative Revision 6 Cumulative Revision 7 without CU variable CU variable included 15 November 2010 16
Regression results Dependent variable: cumulative revision 7 (Δ R8-R1 y) (1) (2) (3) (4) (5) First release (y R 1 ) Capacity utilisation rate Capacity utilisation rate, lagged one year -0.39-0.47-0.49-0.42-0.48 (-6.09) (-5.63) (-6.00) (-5.98) (-5.91) 0.16 0.18 0.12 (2.19) (2.57) (1.90) 0.17 0.12 (2.52) (1.92) Adjusted R 2 0.47 0.49 0.49 0.50 0.50 Number of observations 170 170 167 167 167 Number of countries 17 17 17 17 17 Number of periods 10 10 10 10 10 p-value LR-test for country effects 0.00 0.00 0.00 0.00 0.00 p-value LR-test for time effects 0.00 0.00 0.00 0.00 0.00 p-value LR-test for time and country effects 0.00 0.00 0.00 0.00 0.00 15 November 2010 17
Conclusions Revisions in OECD output gap estimates are almost of a similar magnitude as the output gap estimates itself During the period 1996-2005 output gaps have overall been revised upwards and towards their mean Hence, revisions appear to be predictable I.e., OECD real-time output gap estimates are not informationally efficient Business tendency survey data on capacity utilisation can partly explain revisions Results are robust to changes in the sample 15 November 2010 18