The Information Content
of Capacity Utilisation Rates
for Output Gap Estimates
Michael Graff and Jan-Egbert Sturm
17 October 2010
Overview




Introduction and motivation
Data
 Output gap data: OECD Economic Outlook
 Capacity utilisation: information from Business Tendency Surveys
Empirical analysis
 Design
 Results
Conclusions
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Real-time data
Vintage
Final data
Evaluation
Final data
Final Partly revised
Partly revised
First-released
First-released
Time
Economic forecast
Political decisions
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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
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Measurement of the output gap in real time




Problems with real-time estimates of output gap data
 Late availability and revisions to Y
• All GDP data are either ex-post estimates, or real-time “nowcasts”
or ex-ante forecasts
 End-point problem when estimating Y*
Orphanides & Van Norden (2002)
 Revisions are of similar magnitude as the gap itself
Hence, questionable 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
• …
• This paper: output gap  capacity utilisation from BTS
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Some methods to estimate potential output



Smoothing real GDP using a filter
 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
 ln Y = a + α ln L + (1 – α) ln K + TFP
where L is labour, K capital and TFP ‘total factor productivity’
 ln Y* = a + α ln L* + (1 – α) ln K* + TFP*,
where ‘*’ denotes ‘potential’
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Output gap data: OECD Economic Outlook





Production function based approach
Bi-annual vintages with data at annual frequency
 First vintage:
Jun. 1995
(data cover 1970-1996)
 Last vintage:
Dec. 2009
(data cover 1970-2011)
Bi-annual vintages with data at quarterly frequency
 First vintage:
Dec. 2003
(data cover 1970q1-2005q4)
 Last vintage:
Dec. 2009
(data cover 1970q1-2011q4)
The resulting revision data sets are unbalanced
 Annual data:
22 countries
(up to 287 obs.)
 Quarterly data:
18 countries
(up to 338 obs.)
The largest balanced panels thereof are
 Annual data:
17 countries, 1996-2005
(170 obs.)
 Quarterly data:
14 countries, 2003q3-2005q4
(140 obs.)
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Capacity utilisation data

Sources: European Commission, OECD MEI, KOF, national sources
(in case of Belgium and New Zealand)
 Business tendency survey data
 Question asks for assessment of 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 are (almost) not revised
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BTS: Direct measurement of capacity utilisation
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Australia
Austria
Belgium
Czech Republic
Denmark
Finland
France
Germany
Hungary
Ireland
Italy
Japan
Luxemburg
Netherlands
New Zealand
Norway
Poland
Portugal
Spain
Sweden
Switzerland
United Kingdom
No. countries
Output gap
(vintages)
Capacity utilisation
(reference period)
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
2005:Dec–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
2005:Dec–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
2005:Dec–2009:Dec
1995:Jun–2009:Dec
1997:Jun–2009:Dec
1995:Jun–2009:Dec
2006:Dec–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1995:Jun–2009:Dec
1996q1-2009q4
1996q1-2009q4
1980q1-2009q4
1993q2-2009q4
1987q1-2009q4
1993q1-2009q4
1985q1-2009q4
1985q1-2009q4
1996q1-2009q4
1985q1-2008q2
1970q1-2009q4
1978q1-2009q4
1985q1-2009q4
1985q1-2009q4
1970q1-2009q4
1987q1-2009q4
1992q2-2009q4
1987q1-2009q4
1987q2-2009q4
1996q1-2009q4
1970q1-2009q4
1985q1-2009q4
22
22
Annual data

Countries in bold are not included
in the strictly balanced sample
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Data setup and revision process: Annual data
Reference Period
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
1970
…
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
…
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
…
…
R7
R5
R3
R1
F3
F1
R8
R6
R4
R2
F4
F2
Fx Forecast number x
Rx Release number x
Source: OECD, calculations KOF
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Releases of annual output gaps: unbalanced panel
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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
79.5
1996
rel. 1
Source: OECD, calculations KOF
1997
rel. 2
1998
rel. 3
1999
2000
rel. 4
2001
rel. 5
2002
rel. 6
2003
rel. 7
2004
rel. 8
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2005
CU rate
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Average absolute revisions of annual OG,
balanced panel
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Average revisions of annual OG, balanced panel
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Cumulative revisions of annual OG, balanced panel
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Descriptive Statistics of the annual releases/vintages
degree (in %)
Release 1
Release 2
Release 3
Release 4
Release 5
Release 6
Release 7
Release 8
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)
353 81.5 4.40 64.5 92.3
170 81.4 2.97 74.4 87.5
Output gap (in % of potential GDP)
287 -0.93 1.98 -8.79 5.50 170 -0.79 1.58 -4.86 5.50
283 -0.55 1.65 -5.73 5.68 170 -0.64 1.58 -4.27 5.68
287 -0.40 1.75 -5.50 6.39 170 -0.53 1.64 -4.31 6.39
283 -0.46 1.90 -7.31 6.41 170 -0.46 1.62 -4.06 6.41
287 -0.38 1.97 -7.32 7.66 170 -0.38 1.65 -4.53 7.66
283 -0.51 1.90 -9.54 6.77 170 -0.28 1.59 -3.16 6.77
287 -0.48 1.96 -9.54 6.84 170 -0.24 1.64 -5.11 6.84
283 -0.52 2.02 -9.66 6.83 170 -0.13 1.67 -4.17 6.83
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Estimation design

Data revisions contain news
 revisions are orthogonal to earlier releases and not predictable
yRx(t) = yR1(t) + (t),
cov(yR1(t),(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?
 Rx-R1y(t) = (i) +  yR1(i,t) +  CU(i,t) + (t) + (i,t)
– Rx-R1y(t) represent the cumulative revisions 1 to 7
– Hypotheses: (i) = 0 ,  = 0 ,  = 0
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Efficiency regressions, increasing revision horizons
Dependent variable:
First release (y R 1)
Capacity utilisation rate
2
(1)
(2)
R2-R1 R3-R1
(3)
R4-R1
(4)
R5-R1
(5)
R6-R1
(6)
R7-R1
(7)
R8-R1
-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
Number of observations
Number of countries
Number of periods
0.19
170
17
10
0.26
170
17
10
0.32
170
17
10
0.37
170
17
10
0.47
170
17
10
0.45
170
17
10
0.49
170
17
10
p-value LR-test for country effects
p-value LR-test for time effects
p-value LR-test for time and country effects
0.05
0.00
0.00
0.09
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
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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
without CU variable
Cumulative
Revision 5
Cumulative
Revision 6
Cumulative
Revision 7
CU variable included
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Additional regression results, annual data
Dependent variable: cumulative revision 7 (Δ R8-R1y)
First release (y R 1)
Capacity utilisation rate
Capacity utilisation rate, lagged one period
2
(1)
(2)
(3)
(4)
(5)
-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
Number of observations
Number of countries
Number of periods
0.47
170
17
10
0.49
170
17
10
0.49
167
17
10
0.50
167
17
10
0.50
167
17
10
p-value LR-test for country effects
p-value LR-test for time effects
p-value LR-test for time and country effects
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
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Data setup and revision process: Quarterly data
Reference Period
Vintages / Release Dates
2003
2004
2005
2006
2007
2008
2009
Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec
1970
…
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
…
2010
I
…
I
II
III
IV
I
II
III
IV
I
II
III
IV
…
IV
…
R2
R2
R1
R1
F4
F4
F3
F3
F2
F2
F1
F1
…
R3
R3
R2
R2
R1
R1
F4
F4
F3
F3
F2
F2
…
…
R4
R4
R3
R3
R2
R2
R1
R1
F4
F4
F3
F3
…
…
R5
R5
R4
R4
R3
R3
R2
R2
R1
R1
F4
F4
…
Fx Forecast number x
Rx Release number x
Source: OECD, calculations KOF
…
R6
R6
R5
R5
R4
R4
R3
R3
R2
R2
R1
R1
…
…
R7
R7
R6
R6
R5
R5
R4
R4
R3
R3
R2
R2
…
…
R8
R8
R7
R7
R6
R6
R5
R5
R4
R4
R3
R3
…
…
…
…
R8
R8
R7
R7
R6
R6
R5
R5
R4
R4
…
R8
R8
R7
R7
R6
R6
R5
R5
…
R8
R8
R7
R7
R6
R6
…
…
…
R8
R8
R7 R8
R7 R8
… …
F1 F2
Based on less information
Based on more information
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Releases of quarterly output gaps: unbalanced panel
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Average absolute revisions of quarterly OG,
balanced panel
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Average revisions of quarterly OG, balanced panel
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Cumulative revisions of quarterly OG, balanced panel
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Efficiency regressions, quarterly data
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Conclusions




Revisions to OECD output gap estimates are almost of a similar magnitude
as the output gap estimates
During the (short) sample period, output gaps were overall revised upwards
 Hence, revisions appear to be predictable without further information
Yet, in addition to this, real time BTS data on capacity add further
explanatory power to explain revision process
 OECD real-time output gap estimates are not informationally efficient
 Referring to the survey data available in real time could have improved
output gap estimates
Findings are robust with respect to sample and frequency
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To be done …




Carry out real-time forecasting exercise on country level
Do the results hold when using other output gap estimates
(e.g. those produced by HP filters)
Do other BTS data, e.g. business climate indicators, add information
… (suggestions are highly appreciated)
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