Estimating potential growth crucial for accurate fiscal policy decisions in EU
The article examines how estimating potential economic growth affects fiscal policy decisions. Revisions in these estimates can lead to mistakes in policy decisions, impacting economic growth. The study looked at data from the European Union and found that revisions in output gap estimates were significant, especially during crisis years. The researchers suggest a rule of thumb to reduce errors in measuring fiscal effort by considering that about 30% of changes in actual growth reflect changes in potential growth. This means that responding to positive/negative growth shocks by letting automatic stabilizers work fully can strengthen/weaken the structural position.