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The power of economic models: The case of the EU's fiscal regulation framework

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This paper is concerned with the impact of economic ideas on political processes and decision-making. We argue that economic models can serve as a transmission device between economic paradigms and policy programs, which allows actors drawing on the model to exercise power in decision-making. We illustrate this argument by focusing on the European Commission's 'potential output' model, which represents a core pillar of EU fiscal governance as it provides estimates of 'structural deficits' for evaluating fiscal policies. We combine an analysis of the history and content of the model at stake with insights derived from policy documents, legal provisions, speeches and interviews. Our findings imply that economic models (1) allow for exerting power only under specific conditions; (2) align paradigmatic priors with policy proposals; (3) may constitute mutual feedback loops where political decisions are coined by technicalities and, as a consequence, seemingly innocent technical assumptions become objects of political demands.
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The power of economic models:
The case of the EU’s fiscal regulation framework
Please cite as:
Heimberger, P., Huber, J., Kapeller, J. (2020): The power of economic models: The case of the EUs
fiscal regulation framework, Socio-Economic Review, 18(2), 337-366.
Authors:
Philipp Heimberger Corresponding author. Vienna Institute for International Economic Studies; and
Institute for the Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria
Jakob Huber Institute for the Comprehensive Analysis of the Economy, Johannes Kepler University
Linz, Austria, jakob.huber@gmail.com
Jakob Kapeller Institute for Socio-Economics (University Duisburg-Essen) and Institute for the
Comprehensive Analysis of the Economy (Johannes Kepler University Linz), jakob.kapeller@jku.at
Abstract
This paper is concerned with the impact of economic ideas on political processes and decision-
making. We argue that economic models can serve as a transmission device between economic
paradigms and policy programs, which allows actors drawing on the model to exercise power in
decision-making. We illustrate this argument by focusing on the European Commission’s ‘potential
output model, which represents a core pillar of EU fiscal governance as it provides estimates of
‘structural deficits’ for evaluating fiscal policies. We combine an analysis of the history and content of
the model at stake with insights derived from policy documents, legal provisions, speeches and
interviews. Our findings imply that economic models (1) allow for exerting power only under specific
conditions; (2) align paradigmatic priors with policy proposals; (3) may constitute mutual feedback
loops where political decisions are coined by technicalities and, as a consequence, seemingly innocent
technical assumptions become objects of political demands.
Keywords: Economics, economic sociology, economic methodology, governance, institutions, public
finance.
JEL codes: B41 (Economic Methodology), E61 (Policy Objectives; Policy Designs and Consistency;
Policy Coordination), E62 (Fiscal Policy).
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1. Introduction
Analyzing the interplay between ideas of economists, actual policies and economic outcomes has an
illustrious history political economy research. Ludwig von Mises (1940, p. 744) already argued that
disputes about social order are eventually resolved by arguments about economic theory. Similarly,
Keynes famously posited: “ideas of economists and political philosophers […] are more powerful than
is commonly understood. Indeed, the world is ruled by little else.” (Keynes 1936, p. 383-384)
Relationships between economic ideas, policies and society have been widely studied. A stream in the
political economy literature has treated ideas as central objects of investigation (e.g. Hall 1993; Blyth
2003; Hirschman, Popp Berman 2014; Ban 2016). Past studies on the impact of economic models as
formalized ideas have mostly focused on microeconomic contexts and financial markets (e.g.
MacKenzie 2006; MacKenzie 2011; Svetlova 2012) and have understood models akin to ideas,
metaphors and concepts, which provide a general vision suitable for guiding the design of specific
institutions. Furthermore, the role of economic models as “devices used by actors to induce policy
change” (Henriksen 2013, p. 481) has recently been studied in various contexts, including the
International Monetary Fund’s positional changes regarding the effects of capital controls (Gallagher
2015) and fiscal policy measures (Ban 2015) as well as expert consultation on shadow banking (Ban et
al. 2016). Against this backdrop, the criticism that political economists suffer from “econophobia”
(Watson 2014) is arguably an exaggeration. Nevertheless, most of the existing literature on economic
ideas and their influence on politics and policy programs has been conducted at the level of abstract
theories instead of at the level of more specific economic models that are used by economists working
in policy-making institutions (e.g. Hall 1993; Anderson 2008; Lindvall 2009). As a consequence,
scholars have largely avoided in-depth analyses of how technical details in economic models matter
for political processes. This lack of technical scrutiny, however, leaves under-examined the role of
these models as prime devices in policy-making (e.g. Henriksen 2013; Watson 2014; Braun 2016).
This criticism is arguably most relevant when looking at the role of complex macroeconomic models,
which do not only influence specific policy outcomes, but are important tools in the more general
“quest for governability” (Braun 2014, p. 52).
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Guided by the aim to illuminate the importance of the “arcane nuances” (Braun 2014, p. 70) arising
from the introduction of economic models into the political process, this paper contributes to closing
existing gaps in the literature by studying how economic models affect political processes and
decision-making. By extending the framework developed in Campbell (1998), we propose a new
approach for theorizing how models matter for policy-making. We introduce economic models as
conceptual transmission devices between economic paradigms and political programs. In this view
models are potential carriers for certain political convictions and, hence, allow actors drawing on such
models to exert power in political decision-making under certain conditions. Based on this theoretical
perspective, we provide an in-depth case study on fiscal policy in the EU analyzing the European
Commission’s ‘potential output model’ henceforth: PO-model , which is the core technical
backbone of fiscal policy coordination in the EU’s fiscal regulation framework (Havik et al. 2014;
Tereanu et al. 2014; Costantini 2017). The PO-model is of special political significance, as the use of
the model’s estimations by policy-makers has been shown to have a strong imprint on the scope of
democratic fiscal policy-making in individual EU member states (Klär 2013; Truger 2015;
Heimberger and Kapeller 2017).
The Commission employs the PO-model for estimating the ‘output gap’ the difference between
actual output (Gross Domestic Product, in short: GDP) and a hypothetical, model-based ‘potential
output’ , where the output gap is interpreted as an indicator for the cyclical position of an economy.
Output gap estimates strongly guide the Commission’s judgments on how much of the actual fiscal
deficit (or surplus) in a particular EU country is ‘structural’ in the sense that it is not attributable to the
effect of cyclical swings in the economy on government spending and revenues.1 The EU’s fiscal
regulation framework provides us with an ideal opportunity to study the role of macroeconomic
models as policy tools, because the Stability and Growth Pact as well as the Fiscal Compact explicitly
assign a legal basis to the application of the Commission’s PO-model. In this context model estimates
are used for evaluating and supervising member states’ fiscal performance and underlie the
Commission’s recommendations related to medium-term budgetary objectives (EC 2013; EC 2019). In
practice, this setup implies that model-based estimates of the ‘structural’ deficit feed directly into
1 To arrive at the structural budget balance, the European Commission corrects the headline fiscal balance for the so-called
cyclical component and for budgetary one-off effects (see Heimberger and Kapeller 2017, p. 909-910).
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policy: when the estimate of the structural deficit is high(er), the fiscal scope of member countries is
(more) constrained, as the countries concerned are obliged to adapt to tighter fiscal constraints (Klär
2013; Heimberger, Kapeller 2017). In studying this exceptional macroeconomic model, which is
tailor-made for the specific purpose of fiscal policy-making in Europe, we deepen our understanding
of the role played by economic models in the political process. In doing so, we complement the
recently emerging literature on how economic ideas shape fiscal policy-making (e.g. Blyth 2013;
Braun 2014; Dellepiane-Avellaneda 2015; Helgadottir 2016; Matthijs 2016; Van Esch, Princen 2016;
Haffert 2019; Carstensen and Matthijs 2018; Bremer and McDaniel 2019), as much of this literature
has neglected the analysis of seemingly technical but politically important details of macroeconomic
models used in policy-making.
After providing the theoretical foundations in the following section, we offer an introduction to our
empirical approach in section 3, before turning to core aspects of the history and composition of the
PO-model in sections 4 and 5. Section 6 presents empirical results regarding the causal mechanisms
through which actors use the PO-model to wield power in fiscal governance processes, and section 7
provides an analysis about media reports on the role of the model. Section 8 concludes our argument.
2. Theoretical framework: Types of ideas and devices of transmission
Campbell (1998) blended historical with organizational institutionalism by categorizing four different
types of ideas namely programs, paradigms, frames and public sentiments. Thereby, paradigms are
understood as a framework for structuring and solving puzzles (Kuhn 1962) while programs refer to
professional ideas that prescribe a specific course of policy action (Campbell 1998, p. 386). These two
types operate on a “cognitive” level; they can be conceived as analytical tools. Frames and public
sentiments, in contrast, are important on a symbolic or “normative” level, which generally consists of
assertions regarding values and attitudes. Specifically, public sentiments refer to general attitudes
“about what is desirable or not” (Campbell 1998, p. 392), while frames consist of symbols and
immediately understandable concepts that provide mental shortcuts to some desired outcome or
solution (Lakoff, Johnson 2008).
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Figure 1 is based on the original dimensions in Campbell (1998), summarizing role and purpose of
several types of ideas. In order to better incorporate the role of economic models in the analysis, we
extend Campbell’s framework by locating economic models as a transmission device for translating
paradigmatic assumptions into political actions, which is mostly concealed from the public discourse.
In doing so, we assert that models mediate between economic paradigms and policy programs by
providing simplified representations of complex economic processes, which specify causes and
quantify effects, and by highlighting the impact of certain variables while downplaying the importance
of others. Thereby, an economic model reflects the underlying paradigm in a way that makes it
possible to operationalize the paradigm for specific policy programs.
Furthermore, we argue that some aspects of this mediation between paradigms and policies also affect
the normative level: the model’s focus on specific relationships (e.g. between labor market flexibility
and economic output); its ability to provide politically relevant statistical estimates (e.g. for the
structural rate of unemployment’, the ‘output gap’ and the ‘structural deficit’, respectively); and the
model’s “professional authority” (Hirschman and Popp Berman 2014, p. 790-792) and seemingly
neutral stance in contested policy contexts (e.g. evaluating economic and fiscal performance across EU
member countries) – all these aspects may trickle down to the normative level. In this context, models
may also have an impact on the relationship between frames and public sentiments, e.g. by influencing
public discourse (e.g. De Ville and Siles-Brügge 2015) or by providing legitimacy to specific actors or
policies (e.g. Schmidt 2013). Figure 1 summarizes this description of models as core mediators
between paradigmatic assumptions and political programs, which may eventually also influence
Campbell’s normative level. While the focus in the rest of our study will be on analyzing the role of
economic models on the cognitive level, future research could also focus on analyzing under which
conditions technical assumptions in economic models can affect the normative level in terms of frames
and public sentiments.
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Figure 1: Role of ideas in political economy, extension of Campbell’s (1998) framework. Authors’ illustration.
By inspecting the issue of fiscal policy coordination in Europe, this paper will put some flesh on the
theoretical bones in Figure 1. First, the Stability and Growth Pact and the corresponding PO-model are
rooted in neoclassical economics. Second, the fiscal consolidation programs announced in the
aftermath of the financial crisis received a considerable amount of attention and serve as examples for
clear-cut programs at the foreground of political discourse (e.g. Blyth, 2013). In our case study, we
show that by delivering a benchmark for the fiscal performance of EU member countries, the PO-
model plays an essential role for transmitting vague economic convictions into specific policy
proposals.
While, in principle, all economic models can serve as abstract transmission devices between economic
paradigms and policy programs, for a specific model to actually become a tool used for „seeing and
deciding“ in policy-contexts (Hirschman and Popp Berman 2014, p. 779), additional conditions seem
to be relevant. For instance, Hirschman and Popp Berman (2014) emphasize the ability of economists
to frame policy questions as essentially technical issues, because such technical specificities call for
the economists’ “professional authority” (Hirschman and Popp Berman (2014), p. 790). In this spirit,
our case study on the potential output model tries to excavate the conditions that render the PO-model
Programs: Ideas as elite policy!
prescriptions that help policy-
makers to chart a clear and
specific course of policy action
Concepts in the
foreground
Transmission
device
Background
assumptions
Cognitive
level
Normative
level
Models: Ideas as models!
that build upon formalized
assumptions to define
problems, to specify causes!
and to quantify eects
Paradigms: Ideas as elite
assumptions that constrain the
cognitive range of useful solutions
available to policy-makers
Public sentiments: Ideas as public!
assumptions that contain the!
normative range of legitimate!
solutions available to policy-makers
Frames: Ideas as symbols and!
concepts that help policy-makers!
to legitimize policy solutions to the !
public
overt covert
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an exceptionally powerful device as well as the consequences that emerge from its use in the political
process (cf. Figure 2).
Figure 2: Causal factors surrounding the power of economic models.
3. Research field and methodology
Our research relates to fiscal policy-making in the EU, which, for the purpose of this study, can be
divided into four pillars, each representing a unique perspective on the challenge of cycle-sensitive
budgeting. First, the Commission hosts the Directorate General for Economic and Financial Affairs
(DG ECFIN), which uses PO-model estimates to provide assessments of the ‘structural’ budget
situation of EU member countries and their fiscal effort within the European Semester (e.g. EC 2019).
Second, representatives of the member states in the Council for Economic and Monetary Affairs
(ECOFIN) and its subcommittees such as the Economic and Financial Committee (EFC) make policy
decisions based on estimates of the PO-model.2 Third, public discourse could potentially be affected
by the introduction of the PO-model, although it remains ex-ante unclear how such a transmission
should unfold. Finally, technical experts, mostly economists specialized in statistical modeling,
develop, maintain and update the PO-model. Their focal meeting point is the Output Gaps Working
Group (OGWG), in which technical issues on the PO-model are discussed among the Commission’s
technical experts and delegates of EU member countries. The OGWG usually meets four times a year
2 See Braun and Hübner (2019) for a more comprehensive summary of the organization and decision-making process in EU
fiscal governance.
Model Political !
outcomes
Paradigmatic!
priors
enter the model!
by definition
Device for !
“seeing” and “deciding"
Must be activated!
by actors
Other factorsConditions?
Consequences?
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and consists of delegations from Member States, usually 2-3 medium-ranked econometricians and
statisticians from ministries of finance or national banks, representatives from the DG ECFIN and
guests from European Central Bank (ECB), Organisation for Economic Co-operation and
Development (OECD) and International Monetary Fund (IMF). The main difference between the
OGWG and the EFC, to which it actually reports, is the level of technical expertise: interviewee FC1
estimates that one third of the EFC members “once upon a time has understood whereof the talk is”
whereas the rest “never has understood it” due to differences in educational and professional
background.
To address these diverse fields of engagement with the PO-model and its corresponding estimates, we
choose a mixed-methodology approach, grouping our sources around the PO-model. The design of our
case-study thereby relies on an understanding of the PO-model as an extreme case(Flyvberg 2006,
p. 230, Seawright, Gerring 2008, p. 297): the PO-model is a model of exceptional political importance
due to its institutionalization within the EU’s fiscal regulation framework (e.g. Klär 2013; Heimberger
and Kapeller 2017). We study this case by “explaining outcome process-tracing” (Beach and Pedersen
2016, p. 309), as we trace how the actors that draw on the PO-model rely on causal mechanisms for
mapping paradigmatic priors onto political action, which allows us to gain a clear understanding of the
conditions and consequences associated with the power of economic models. Hence, our study on the
role of the PO-model in EU fiscal policy-making can be read as a “theory-centric” work focused on
complementing past accounts on the political power of economic ideas (e.g. Hall 1993; Campbell
1998), as well as a “case-centric” contribution, which examines a case of specific historical
importance (Beach and Pedersen 2016, p. 305).
As our methodological focus is really on the case of the PO-model as such, generalizations of our
findings to other economic models should not be drawn light-heartedly as they will mostly require
additional qualifications. However, the results of this study can hopefully facilitate the identification
of similar cases of powerful economic models by explicating some of the conditions that make the PO-
model such an exceptional case.
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To get a better understanding of how the PO-model feeds into the political process, we relied mainly
on studying legal and policy documents as well as technical publications and speeches. These readings
were complemented by a replication of the Commission’s PO-model to allow for computational
experiments, i.e. the simulation of different scenarios within the model framework applied by the
Commission. Finally, we also conducted six qualitative expert interviews with high-level
representatives from European institutions to further validate our understanding of the reception of the
model-outputs by policy-makers as well as administrative staff (see Figure 3).3 A full list of our data
sources is available in an accompanying appendix.
Figure 3: Research methodology consisting of four pillars. Authors’ illustration.
While four interviewees represented European institutions, two others were affiliated with
perspectives of individual member states. In terms of nationality, interviewees come from Austria,
Finland, Ireland, Italy and Spain. In terms of education, all interviewees hold academic degrees in
economics and/or statistics. Interviews were conducted face-to-face or via telephone during 2016,
3 See Schulz (2019) for a recent survey of the literature on EU economic governance, including a discussion on the empirical
strategies used in the relevant studies, which often also use expert interviews and document analysis.
Experts
pillar
Commission
pillar
Council
pillar
Public
pillar
policy documents (11)!
legal provisions (12) !
technical papers (4)!
interviews (6)
public !
speeches (18)!
newspaper!
articles (440)
interviews
with two members
of the experts
working group
on output gaps
(WG1, WG2)
interviews
with two
senior officials
from the
Commission units
for model
building and fiscal
surveillance
(EC1, EC2)
interviews
with two
policy-makers
from the Economic
and Financial
Committee
(FC1, FC2)
Newspaper
articles:
The Economist,
Financial Times,
Frankfurter
Allgemeine
Zeitung,
Die Zeit,
Le Monde.
full case study database
interviews
media analysis
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recorded, transcribed and evaluated by means of topical grouping (Kohlbacher 2006). Expert
interviews helped us to better contextualize our document-based analysis by gaining information on
the actual practices and discussions around the PO-model.
4. The structural deficit and the Stability and Growth Pact: A short history
While economic indicators such as potential output’ or the ‘structural deficit’ had already been
estimated in the 1990s, their practical importance for economic policy design in the EU has greatly
increased in the aftermath of the financial crisis. In what follows, we illustrate the institutional
emergence of the potential output approach for calculating structural deficits against the backdrop of
the evolution of the EU’s fiscal regulation framework (see Figure 4).
Figure 4: Development of the EU’s fiscal regulation framework on legal and technical level (1992-2015). Authors’
illustration.
Maastricht treaty (1992)
Legal level
Convergence criteria:
3% nominal deficit,!
60% debt-to-GDP
Amsterdam treaty (1997)
Preventive arm: nominal MTO!
Corrective arm: exception of 2%!
GDP fall
SGP amendment (2005)
Preventive arm: structural MTO!
Corrective arm: exceptions!
if GDP growth is negative
Six pack (2011)
Fiscal Compact (2012)
Two pack (2013)
Six Pack: annual MTO adjustment;!
expenditures evaluated against !
potential output growth!
Fiscal Compact: Structural deficit!
max. 0.5% of GDP!
Two Pack: Intensified monitoring!
and corrective action
Technical level
Establishment of Output Gaps!
Working Group
Introduction of neoclassical!
production function approach
Technical changes in model-estimation!
to proxy ‘structural unemployment’
Technical changes in model-estimation!
to proxy ‘technological progress’
Flexibility
Guidelines
(2015)
Investment clause;!
MTO adjustment!
requires link!
to output gap!
estimates
2011-2014
2007-2010
Technical changes in model-estimation!
to proxy ‘structural unemployment’
2003-2006
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2002
1999
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In 1992, the Maastricht Treaty laid the foundations for what should later become the Stability and
Growth Pact. Specifically, it introduced convergence criteria stipulating nominal reference values for
the fiscal deficit (3% of GDP) and public debt (60% of GDP). Higher deficits were regarded as
acceptable whenever they were judged to be exceptional and temporary, but the Maastricht Treaty did
not include any explicit criteria for assessing the economic cycle. Hence, the political management of
the business cycle was mainly an informal issue as the already availablestructural indicators were
associated with “severe methodological and measurement problems” (EMI 1995, p. 22) and, hence,
were judged to be inadequate for informing economic policy-making. In 1997, the introduction of the
Stability and Growth Pact tightened this regime by recording that “budgetary positions close to
balance or in surplus will allow all Member States to deal with normal cyclical fluctuations while
keeping the government deficit within the reference value of 3% of GDP” (Council Resolution 1997,
OJ C 236). The resolution introduced the so-called preventive arm and the associated medium-term
budgetary objectives for member states (MTO) as well as the corrective arm including the excessive
deficit procedure (EDP). The EDP is supposed to ensure that Member States take fiscal policy
measures to correct ‘excessive’ fiscal deficits, and it puts special disciplinary scrutiny on the
budgetary decisions of countries in an ongoing procedure. To maintain fiscal discipline, the Stability
and Growth Pact (SGP) allows for imposing financial fines on non-compliant countries (e.g. EC
2013), and this threat of potential enforcement is supposed to strengthen compliance with existing
rules.
In 1999, the ECOFIN Council established the Output Gaps Working Group as an ad-hoc expert
council dedicated to developing new methodologies for determining what is ‘structural’ about the
headline fiscal deficit. This working group issued its first internal report in 2001 and published a first
technical paper in the following year (Denis et al. 2002), clearly opting for a neoclassical production
function approach to replace existing routines based on purely statistical filtering methods. Finance
ministers adopted the proposal and welcomed the Commission’s approach, which effectively
overturned past skepticism on model-based indicators for assessing the cyclical position of domestic
economies. Since 2002, the Output Gaps Working Group has refined and modified the methodology
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(see Figure 4), with changes being summarized in special reports (Denis et al. 2002; Denis et al. 2006,
D’Auria et al. 2010; Havik et al. 2014).
Between 2001 and 2005, the political discourse on the Stability and Growth Pact was coined by
Germany’s and France’s breach of deficit criteria. The debate on the appropriateness of the 3% limit in
times of economic turmoil triggered major revisions of the Stability and Growth Pact: in autumn 2003,
France and Germany blocked a strict implementation of the SGP by rejecting a recommendation from
the European Commission, which had requested additional fiscal adjustment efforts. After the
excessive deficit procedure was put on hold, the European Commission decided not to simply accept
noncompliance with the SGP, but presented a new communication calling for the implementation of
medium-term budgetary targets and for the consideration of additional economic factors when
assessing the fiscal situation in member countries. The ultimate goal of the Commission was to
improve the enforcement of fiscal rules, i.e. to make sure that countries such as Germany and France
would not be able to escape from being sanctioned in the future. In practice, the SGP reform amounted
to a shift away from nominal reference values (cf. Fischer et al. 2006, p. 6-8) towards model-based
estimates (‘structural deficits’), and these steps were initially triggered by the fiscal calamities
experienced by the two major political powers in Europe, namely France and Germany. As a reaction,
the Commission aimed for greater capabilities for enforcement, which eventually boosted the practical
importance of model-based estimates. As interviewee FC2 points out, the move towards model-based
assessments of the fiscal balance aimed at resolving political conflicts by referring to a technical
instrument devised by experts, which comes with its own challenges and difficulties: “For economists,
the structural deficitis understandable. In their models it’s actually very well defined. But in the real
world it is not only unmeasurable; it is also undefined. We are not sure what we mean by the
concept.”
This change in attitude towards cyclically-adjusted budget indicators became visible when a limit of
1% of GDP on ‘structural deficits’ was introduced in 2005 to account for “the diversity of economic
and budgetary positions and developments” and “allow room for budgetary maneuver, considering in
particular the needs for public investment” (Council Regulation 1055/2005). After the SGP reform in
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2005, references to the ‘structural deficit’ also became more prominent in the legal framework (Larch
and Turrini 2009). This change constituted a delicate and contested issue right from the beginning. For
instance, interviewee FC1 recalls that the ministers regarded structural budget measures as “much
better, but unfortunately not directly observable”, while FC2, who views the reform as a “disservice”,
also emphasized that it “opened the door (…) towards unobserved variables”.
The global financial crisis and the ensuing public debt crisis pushed fiscal policy into a new era: in
times of enforced fiscal tightening, the structural deficit has become more important for enforcing
budgetary discipline. Major legislative packages strengthened model-based estimates relative to
observable budgetary criteria: the Six-Pack-Legislation of 2011 committed member states to achieving
annual improvements of the structural balance by 0.5% of GDP whenever they failed to meet their
medium-term budgetary objective. The expenditure rule implies that growth in public expenditures
must not exceed growth in potential output. Furthermore, the Fiscal Compact introduced in 2012
effectively restricted the annual structural deficit to 0.5% of GDP. The contracting member states
agreed to implement a correction mechanism (“debt brake”) at the national level. Finally, the Two-
Pack-Legislation further intensified surveillance from 2013 onwards (e.g. EC 2013).
However, policymakers in Brussels remain ambivalent regarding how they assess the fiscal
framework: while some governments demand additional discretionary room against the background of
“objective and subjective difficulties with calculating structural deficits” (FC1) and the “general
feeling that [the] structural deficit is far too fragile to rely on” (FC2), the Commission’s experts argue
that the established methodology is much more reliable than commonly believed (McMorrow et al.
2015; Buti et al. 2019). In other words, the assessment of the performance of the structural deficit
derived from the underlying PO-model has become a politically contested issue.
To summarize, model-based ‘structural deficit’ indicators were mostly rejected as inadequate
throughout the 1990s. From 1999 onwards, they have gained importance: first, while the reform of the
Stability and Growth Pact in 2005 added significantly to the importance of the structural deficit as a
major control indicator, subsequent reforms since the financial crisis have further strengthened its role.
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As a consequence, the structural deficit has become a prime object of concern in EU economic policy
conflicts. Partly because of this development, the Commission and the Council have loosened
rigidities related to the ‘structural deficit’ to some extent in 2014 by introducing so-called ‘flexibility
clauses’ in the SGP (EC 2015). Nevertheless, the structural deficit derived from the PO-model plays a
powerful role; if it is taken as the “sole indicator for success and failure, [it] becomes politically
explosive due to the dissonance and complexity of the output gap evaluation”, as FC1 admits.
5. The machine room: Historical and technical aspects of the potential output
model
We continue by focusing on how the PO-model actually produces the estimates relevant for policy-
making. We first give a brief history of ‘cycle-sensitive’ budgeting to raise awareness about how this
classical theme has been received by economists and policy-makers. In a second step, we aim to
illuminate the inner workings of the Commission’s PO-model to identify its underlying political and
conceptual priors as well as the technical properties that eventually feed back into the policy process.
5.1 At the gates: The European conception of cycle-sensitive budgeting
The traditional concept of cycle-sensitive budgeting is to adapt the public sector’s fiscal balance to the
cyclical conditions of an economy. Expansionary fiscal policies in crisis times should be combined
with contractionary fiscal policies in economically beneficial times, allowing for policy-mitigation of
the ups and downs of the business cycle (e.g. Carnot, de Castro 2015). A variety of different general
strategies and specific methodologies exist when it comes to performing cyclical adjustments of fiscal
variables, as illustrated by Table 1.
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Table 1: Different approaches to cycle-sensitive budgeting.
Depth of strategic
decision (Hall 1993)
Main goals
Preferred instruments
Operative applications
The origins of cycle-sensitive budgeting lie in a Keynesian approach to fiscal policy. The concept was
first proposed by Gunnar Myrdal, who wanted to allow the Swedish government to balance the budget
over the entire business cycle, which was supposed to promote a fiscal policy capable of smoothening
cyclical swings in the economy (see Costantini 2018, p. 86). The concept of cycle-sensitive budgeting
gained importance when it was incorporated into fiscal programs in the New Deal era of the 1940s,
where it helped popularize Keynesian thinking. In this original sense, cycle-sensitive budgeting was
tailored to contribute to the engineering of full employment, and the corresponding ‘High-
Employment-Budgets’ were built upon politically agreed target levels of unemployment. Tax rates and
public expenditures were set to yield small surpluses if the target was reached, so that automatic
stabilizers (e.g. unemployment benefits, income taxes) would lead to deliberate deficits if the target
unemployment rate was surpassed (Costantini 2015). In politics, this Keynesian budgeting-approach
was eventually pushed aside by Reagonomics (Campbell 1998). In economic theory, neoclassical
macroeconomics put forward the central proposition about the ineffectiveness of expansionary fiscal
policies (Lucas 1975), which implied a focus on controlling inflation rather than employment. In
Hall’s (1993) terminology, this move towards emphasizing inflation and deficits represented a major
(“third order”) change in the goals of economic policy.
Cycle-sensitive budgeting, as employed by the European Commission, focuses on the cyclically-
adjusted balance (CAB) as a core performance indicator. The CAB is calculated by means of the PO-
16
model and represents a hypothetical budget balance that would materialize if all cyclical fluctuations
were absent (and, hence, potential output would equal actual output). Interestingly, Blanchard (1990)
argued that the cyclically-adjusted balance (CAB) is the most deficient choice for relating the cyclical
position of an economy to its budgetary performance. Instead of focusing on the CAB or any other
single indicator, he proposed considering a plurality of indices for each purpose at least one
involving only current data and one involving forecasts. Although Blanchard can safely be considered
one of the most influential macroeconomists of our time, international institutions such as the
Commission, OECD, IMF or ECB mostly ignored his proposal to broaden the acceptable set of
instruments for fiscal surveillance (Larch and Turrini 2009, p. 6). In stark contrast, we have witnessed
a further increase in the importance of structural indicators based on the concept of potential output
and the cyclically-adjusted balance, for which many major international organizations (ECB, OECD,
IMF…) provide in-house estimates (e.g. McMorrow et al. 2015).
In the year 2002, the EU finally switched from a purely statistical de-trending to theory-based
approaches of estimating the structural deficit, leading to the Commission’s current methodology,
which builds upon neoclassical theoretical priors about the inner workings of an economy and applies
statistical de-trending only at the level of (sub-)factors of production (Heimberger, Kapeller 2017). In
doing so, the European Commission’s approach to cycle-sensitive budgeting has assigned a greater
weight to paradigmatic priors in economic policy-making on which theory-based approaches to
estimating potential output naturally rest. In what follows, we explore this current practice more
closely to identify the major transmission belts between paradigmatic priors and final policy
recommendations.
5.2 Inside the machine room: The Commission’s potential output approach
How much of the actual fiscal deficit (or surplus) in a particular EU country is ‘structural’ in the sense
that it is not attributable to cyclical swings in the economy? The current Commission approach used to
answer this question is described in technical publications (Havik et al. 2014; Mourre et al. 2014). The
cyclically-adjusted budget balance is given as the nominal headline budget balance corrected for the
17
effects of the business cycle.4 The cyclical component of the budget balance is derived by multiplying
the model-based output gap estimate with a sensitivity parameter (𝜖), which captures the sensitivity of
the budget balance towards the output gap. The output gap is the difference between actual output and
the model-based estimate of potential output (PO), expressed in percent of potential output.
The Commission’s PO-model is rooted in the neoclassical paradigm, as it builds on a neoclassical
production function (Cobb, Douglas 1928; Solow 1957; Havik et al. 2014).5 Notably, the Commission
models the economy exclusively from the supply-side. The model is based on the notion that
economic growth emerges from competitive markets implying steady economic progress that is
sometimes constrained by regulation and random deviations. Hence, the PO-model is consistent with a
paradigm that addresses macroeconomic problems by looking at the supply side of an economy
instead of focusing on aggregate demand (see section 6.2). Formally, potential output is estimated as a
function of the production factors labor supply and capital, and a proxy-variable for technological
progress.6
Core ideas of the neoclassical paradigm are characteristic when defining the model’s subcomponents.
For the calculation of the production factor labor, estimates of ‘structural unemployment’ are of
particular importance: the higher the estimate of ‘structural unemployment’, the lower the contribution
of the production factor labor to potential output (and vice versa). ‘Structural unemployment’ is
proxied by a statistical estimate, the NAWRU’, which refers to the non-accelerating wage inflation
rate of unemployment. It encapsulates the proposition that any economy can be characterized by an
unobservable rate of unemployment at which inflation remains stable. The Commission also relates
the NAWRU to Milton Friedman’s idea of a ‘natural rate of unemployment’, which represents
‘structural unemployment’ independently of all temporary and seasonal fluctuations (Friedman, 1968).
As theoretical postulates such as the NAWRU are unobservable (in contrast, e.g., to the concept of the
actual unemployment rate), the Commission estimates the NAWRU by using a statistical filtering
model. Although the matter appears to be a technical detail, the statistical filtering model used by the
4 In addition to correcting for cyclical effects on government revenues and spending, the Commission also accounts for one-
time and temporary effects such as costs related to bailing out financial institutions (e.g. Mourre et al. 2014).
5 Although the Cobb-Doublas-framework is indeed well established within mainstream macroeconomics, many criticisms
have been put forward that challenge its theoretical foundations and empirical usage (e.g. Felipe, McCombie, 2014).
6 Both L and K are raised to the power of their output elasticity (𝛼 and 1𝛼, respectively). 𝛼 is set to be constant at 0.65 for
all member states and all years and reflects the overall wage share of 0.63 (Footnote 5 in Havik et al, 2014:10).
18
Commission, a so-called Kalman-filter that has its conceptual origins in aviation, is crucial for the
entire estimation-approach of structural deficits (Fioramanti, 2016; Heimberger und Kapeller 2017).7
The basic idea behind the filtering is to take new data on unemployment and wage-inflation and feed it
into the Kalman-filter model dedicated to decomposing ‘trend’ and ‘cycle of unemployment by
statistical means. The resulting trend-component is in turn interpreted as representing the NAWRU
and, hence, used as a proxy of ‘structural unemployment. NAWRU estimation constitutes a delicate
procedure full of uncertain assumptions (Cerra, Saxena, 2000; Laubach 2001; Fioramanti, 2016): as a
consequence, the Commission’s NAWRU estimates have been heavily contested both by
macroeconomic researchers and within the institutions of European policy-making, as we will see in
section 6.3.8 In the context of these debates, a specific property of the Kalman-filter approach for
estimating ‘structural unemployment’ is of special importance: the last empirical observations have an
over-proportionally strong impact on model-outcomes and, hence, the whole technique suffers from an
end-point bias (see Heimberger and Kapeller 2017, p. 11).
Finally, the proxy for technological progress in the PO-model is derived from another neoclassical
workhorse, the so-called Solow-growth residual (Solow 1957). The Solow residual, by definition, is a
catchall variable for all factors contributing to changes in GDP that are not explained by changes in
labor supply or capital. It therefore also includes errors and biases related to measurement, aggregation
and model misspecification (Hulton 2001, p. 9). Hence, the proxy for technological progress used in
the Commission’s PO-model can be seen as a “measure of our ignorance” (Abramovitz 1956, p. 11).9
To summarize, the Commission’s production-function approach, on which the calculation of
‘structural deficits’ is based, combines several standard neoclassical assumptions that operationalize
7 The main routine of the Kalman-recursions is to assess the relative performance of the model vis-à-vis empirical
measurements every time new data is entered (Heimberger, Kapeller 2017).
8 While ‘natural rate theory’ postulates that the NAWRU can be exclusively explained by ‘market rigidities’ especially by
referring to employment protection legislation, minimum wages, tax wedges etc. on the labor markets , the Commission’s
NAWRU estimates are indeed to a large extent driven by ‘non-structural factors’ related to the ups and downs of the business
cycle (Heimberger et al. 2017). Nevertheless, the Commission largely sticks to the neoclassical interpretation of the NAWRU
(Stockhammer 2008) by interpreting the Kalman-filter’s NAWRU estimates as a good proxy for ‘structural unemployment’
(Orlandi 2012).
9 Turning to the empirical separation of ‘trend’ and ‘cycle’ of technological progress, total factor productivity (based on the
Solow residual) is also de-trended using a Kalman-filter, as 𝑇𝐹𝑃
!"#$% is linked to capacity utilization. The latter is captured
by the combination of observable capacity utilization in industry and two survey-based business sentiment indicators (Havik
et al., 2014:59). The share of TFP that is attributable to changes in capacity utilization is deemed cyclical, the remaining part
structural.
19
core ideas of the neoclassical paradigm in policy-making. Central components of the model
‘structural unemployment’ and technological progress are unobservable, while their model-based
proxies are theoretical conceptions with strong normative implications, which eventually have to be
estimated by statistical filtering techniques largely unrelated to the underlying theoretical conceptions.
As emphasized in section 4, the neoclassical production function approach was introduced in the early
2000s (Denis et al. 2002), but over the years the model has undergone several refinements and
modifications (see Figure 4).
5.3 Model authority and political legitimacy
Crucially, the adoption and development of the PO-model by experts of the European Commission
falls into a period dominated by neoclassical ideas in macroeconomics (e.g. Dobusch and Kapeller
2009) and by the supply-side paradigm in economic policy-making (e.g. Trichet 2004). The choice of
the neoclassical framework of the PO-model and its subcomponents can be understood against this
backdrop: indeed, it is difficult to imagine that an institution such as the European Commission could
have opted against core mainstream economic ideas in the early 2000s by adopting, for example, a
Keynesian approach to modeling ‘structural unemployment’ and ‘potential output’.10 Against the
background of neoclassical paradigmatic dominance, the reliance on paradigm-compatible priors
ensured that the PO-model developed by the Commission could fully rely on the “professional
authority” (Hirschman and Popp Berman 2014, p. 790) associated with academic economics.
The constant struggle for legitimacy is a core tenet in the political science literature, which
distinguishes between ‘input’ legitimacy and ‘output’ legitimacy as well as ‘throughput’ legitimacy.
While input legitimacy relies on European citizens expressing their demands in the respective
institutions, output legitimacy depends on whether policies work effectively for the people (e.g.
Scharpf 1999). Throughput legitimacy, however, is concerned with what is going on in the ‘black box’
of governance processes in the space between political input and policy output (Schmidt 2013). In the
10 Such a Keynesian approach would require that both unobservable variables follow endogenously from changes in
economic activity affecting the utilization rate (e.g. Stockhammer 2008; Klär 2013), rather than being determined by
‘exogenous’ supply-side factors. Fontanari et al. (2019) challenge the supply-side view of potential output used by the
European Commission and develop an alternative demand-led growth framework for estimating potential output.
20
context of our case study, throughput legitimacy involves the ideas and deliberative actions of the
actors involved in the EU’s fiscal policy governance processes; it is about how the fiscal policy-
making process works institutionally to ensure the efficacy of EU fiscal governance, the accountability
of those engaged in making fiscal policy decisions, and the transparency of the underlying processes.
Hence, the PO-model can be understood as strengthening the legitimacy of the actors that use it.
However, it can only provide such throughput-legitimacy to political actors, when the model itself is
understood as an authoritative tool for policy-making.
We have already seen that the authority of the PO-model is strengthened by its close relation to
dominant views in academic economics as well as by its legally binding role and the corresponding
potential for enforcement by means of budgetary surveillance and financial sanctions. Moreover, the
Commission as the EU’s core actor in surveying, coordinating and enforcing fiscal policies is
constantly questioned by member states, as limits on deficits and expenditures diminish the national
governments’ political autonomy. As a consequence, the Commission strives to strengthen the
authority of the PO-model to eventually improve its own position in the policy-making process (e.g.
Buti et al. 2019).
We argue that the PO-model’s role in contributing to “throughput legitimacy” (Schmidt 2013) relies
not only on expert and legal authority, but also on two additional sources: impartiality and ownership.
When it comes to impartiality, the aspired “equal treatment” formally means that the same rules are
applied to every member state: the PO-model is general in the sense that it is applicable to all countries
under all circumstances and considered non-partisan, i.e. not favoring any specific political ideology
or country. Hence, the PO-model is presented as immune towards subjective interests of particular
countries. This ‘impartiality’ enhances the authority of the PO-model, which in turn supports the
‘throughput legitimacy’ in the European governance process. Once alleviated to this position, the
model supplies specific results that can be framed as ‘transparent’ and objective model-based
judgments regarding how much of the fiscal deficit cannot be attributed to the business cycle. By
applying the model, the Commission acts, in the words of one of our interviewees (EC1), “very
independently and impartially; in this vein, “complete transparency and predictability” are deemed
21
crucial for effective policy coordination (interviewee EC1). Similarly, interviewee EC2 finds that the
Commission has less room for discretionary judgment than the IMF as member states would oppose
such a course of action: “They [the IMF] have a formula but then put the number that they like and
think is best (…) in a sense their [output gap of] -4 is more true than our -2 for Spain. But we cannot
do this, member states would shoot at us” (EC2). The quest for achieving throughput legitimacy has
consequences for the treatment of model outcomes as the Commission tries to “keep the level of
judgment to an absolute minimum” (EC1). Model results are taken literally and as EC1 emphasizes
they are not subjected to further reflections regarding their plausibility, let alone modifications based
on discretionary country assessment. These observations clearly point to the fact that the Commission
is careful not to challenge the authority of the PO-model as those working for the Commission are also
the main actors drawing on its potential to exert power.
To further strengthen the authority of the PO-model, the Commission frequently frames the latter as
being based on a “common methodology” or “commonly agreed method” (e.g. in interviews, in the
OGWG’s online self-portrait11 or in publications such as EC 2012, Mourre et al. 2014 and Buti et al.
2019). Increasing the national ownership of EU rules is seen as a key measure in line with a better
enforcement mechanism in the new governance framework envisaged in the Five President’s Report
(Juncker et al., 2015, p. 14). The emphasis on member states owning the methodology not only
contributes to its acceptance; it also allows for rejecting methodological criticism by pointing out that
the agreement was reached by all member states.
Although the claim of common ownership is formally correct, it has to be put into perspective. At the
political level, one could argue that back in the year 2005 the relevance of model-based fiscal
estimates was initially increased to make sure that countries such as France and Germany would not be
able to avoid being sanctioned in the future if they were to violate the SGP’s deficit rules. However,
the calculation of these cyclically-adjusted deficit estimates was only slowly and marginally adapted
when Southern European countries experienced a deep economic slump in the years after the start of
the global financial crisis. This lopsidedness reflects existing power asymmetries within the Eurozone
(e.g. between creditor- and debtor-countries; Frieden and Walter 2017). From a more practical
11 URL: http://europa.eu/epc/output-gaps-working-group_en [last download on April 12th 2019].
22
perspective, it is the Commission’s economic experts that develop the PO-model’s foundations and
necessary software applications. In doing so, the Commission sets technical standards for achieving
fiscal policy coordination. Once approved, these standards are effectively conserved by the unanimity
regime of the OGWG, since proposals challenging established practices have to be accepted by every
EU member state. In other words: while the initial decision in the late 1990s to adopt a neoclassical
approach of modeling an economy’s output (from a supply-side perspective) can be understood
against the background of the dominance of neoclassical ideas in macroeconomics (Dobusch and
Kapeller 2009), the political unanimity requirement for choosing a different modeling approach has
effectively triggered a path-dependent process, in which established neoclassical priors are difficult to
challenge and relatively marginal technical model adaptions are the most realistic way to achieving
model estimates that “work for your country(interviewee WG1). Eventually, the degree to which a
member state actually perceives the methodology as being ‘commonly owned’ can be expected to vary
and correlate with subjective interests of member states. In line with past observations, interviewee
FC2 reports on “very significant differences in the EFC and in the Council” and shares the impression
that these tensions imply that “the common methodology is not widely supported or shared”. This
aspect, which was also emphasized by interviewee WG1, is hardly visible in the Commission’s official
presentation regarding the role of the PO-model.
The throughput legitimacy provided by the PO-model in the EU’s fiscal governance processes is not
only a product of expert knowledge, but also contributes to rendering questions of fiscal policy choice
as technical issues best left to experts (Crouch 2004). In the words of one of our interviewees from the
Commission: “Our job is to sort of simplify the whole thing and convey it in a politically [acceptable
way]... if the economics is correct, then we try and persuade them that this is first of all the fair thing
to do and is economically justifiable” (EC1). This view resonates well with the argument of
Hirschman and Popp Berman (2014) who argue that economic ideas and concepts become more
powerful as the underlying problem is mainly understood as a technical issue.
Summing up, the authority of the PO-model is supported and upheld in various ways. In turn, the
authority of the PO-model feeds back on the European Commission, which draws on the model to
23
reach decisions on fiscal governance, and, thereby, shapes the “coordinative discourse” (Schmidt
2013, p. 17) on EU fiscal policies: as a consequence, the Commission’s technical experts, who are key
for protecting the model’s authority as well as the only ones knowing all the ins and outs of the model
(thereby acting as the ‘gatekeepers’ of the PO-model), find themselves in an authoritative position vis-
à-vis those actors representing an EU member state.
6. Models as mediators between economic paradigms and policy programs
We continue by investigating how the PO-model can be used to exert power in political processes.
Against the background of the theoretical framework introduced in section 2, Figure 5 provides an
extended causal map, which summarizes a series of observations made throughout the paper. First, the
PO-model is characterized by neoclassical paradigmatic priors, which enter the model by definition.
Second, we have discussed two auxiliary conditions that influence how much power can be exerted by
means of the PO-model. More specifically, we found that the position of the PO-model has been
formally strengthened by implementing stronger (legal) enforcement as well as by supporting and
upholding the model’s authority. Both factors increase the model’s potential power: model-based
diagnoses about whether ‘structural’ deficits of member countries are compliant with the fiscal rules
have to be enforceable and authoritative. These conditions are basically fulfilled in our case, because
the model is enforced by the EU’s fiscal regulation framework and its authority is supported by a
variety of factors as discussed in section 5.3. In addition, the PO-model’s authority is also relevant for
sustaining and strengthening the throughput legitimacy of the European fiscal governance process.
24
Figure 5: Mapping the causal factors most relevant for the case of the PO-model
Through what mechanisms does the PO-model allow for wielding power? As soon as the PO-model is
activated by the European Commission and national policy-makers in the sense that these actors
negotiate fiscal policy based on the PO-model’s estimates of the ‘structural’ deficit, the model starts to
serve as a device for seeing as it not only suggests a coherent ‘supply-side vision’ of the economy, but
also produces numbers that allow those involved in the EU fiscal governance process to see the world
in a novel and, allegedly, more precise way. However, the PO-model also serves as a device for
deciding as it highlights certain policy options while hiding others. These causal mechanisms bring
about political outcomes. In particular, the PO-model leads to a supply-side focus, which prioritizes
fiscal consolidation in conjunction with labor and product market deregulation over demand-side
policies such as public investment. The empirical findings presented below allow us to substantiate the
claims about how the PO-model serves as a transmission device between economic paradigms and
policy programs (see section 2) and, thereby, is activated by representatives of the European
Commission and of national governments to wield power over fiscal policy. In addition, Figure 5
indicates that the supply-side focus in political outcomes induced by the model creates novel political
demands that aim for changes or revisions of the model-based policies implemented by the
Commission.
Authority
PO-!
model
Political !
outcomes
Neoclassical!
paradigmatic!
priors
enter the model!
by definition
Supply-side!
focus
(+)
Enforcement
(+)
Device for !
“seeing” and “deciding”
Must be activated!
by actors
Other factors
(+)
Political!
demands
‘Throughput’-legitimacy
(+)
25
6.1 A device for seeing: Transmitting paradigmatic assumptions into policy programs
The first causal mechanism of how the use of the PO-model brings about political outcomes is that it
serves as a “device for seeing” (see Hirschman and Popp Berman 2014, p. 796-797) by mapping core
paradigmatic assumptions onto the policy process. It implies a priority of supply-side policies, such as
labor and product market reforms, over demand-side policies, such as discretionary changes in public
investment or the introduction of a public employer of last resort. While the PO-model itself is
categorically apt for both supply- and demand-side policy recommendations, a theoretical rationale is
provided only for the former: while the PO-approach explicitly models the economy via the supply
side (Havik et al. 2014), cyclical variations potentially motivating demand-side policies are introduced
only as a temporary nuisance where the assumption is that deviations from potential output are
merely temporary, as market forces will quickly make the economy revert back to its full potential
(Ball 2014). Furthermore, whenever the estimates of potential output are close to or below actual
output, the scope for demand side policies within the EU’s fiscal regulation framework is inherently
constrained (Heimberger, Kapeller 2017).
The basic story behind the Commission’s modeling approach is that policy-makers who want to
deliver steady economic progress ought to introduce supply-side measures labor market reforms,
product market deregulation etc. in conjunction with fiscal policy restraint, which allow for
productivity growth and ensure highly competitive markets in combination with low ‘structural’
deficits. A team consisting of Commission economists put this story in a nutshell: “Strengthening our
economic fundamentals [i.e. increasing potential output] will require further reforms in labor and
product markets, beyond those carried out during the crisis to restore competitiveness” (Canton et al.,
2014, p. 1). This argument is in line with the assurance by all our interviewees that the key criterion
for the PO-approach is that it is able to explain: the model has to be “simple enough for policy makers
to work with” (EC1) and should come with the ability to “convey a story” (EC2) to politicians. By
framing policy choices as technical problems, the model attains a kind of pedagogical function,12 as it
provides a “very effective tool for helping policy makers understand what has happened in the past,
12 Foundations for theorizing the pedagogical value of economic models can be found in Broome (2010) as well as Broome
and Seabrooke (2015).
26
what are those policy drivers that have actually made a difference (…) and that they have a
framework looking forward in terms of how they can influence their underlying growth patterns“
(EC1). In contrast, more complicated modeling approaches, such as the Commission’s in-house
Dynamic Stochastic General Equilibrium model lead policy-makers “to be alienated by excessively
jargonistic type stuff” (EC1). The exact mapping of theory and policy is, hence, crucial for the causal
mechanism of “seeing” by relying on the PO-model’s estimates: “the advantage of the Cobb-Douglas-
Function [is] that you get neat division of where the growth comes from, what part comes from labor
growth, capital intensity and also factor productivity” (FC2). This ability to generate a direct and
intuitively understandable mapping of the impact of different variables on economic development
transmits the theoretical preconceptions underlying the model into the political process.
6.2 A device for deciding’: Highlighting and hiding explanatory factors
We now examine the second causal mechanism through which the PO-model triggers political effects:
the model serves as a device for deciding (Hirschman and Popp Berman 2014, p. 797-800) as the
technical properties of the model assign a prominent position to some specific policy-options while
downplaying others. In the words of interviewee EC2, “a good model is something that allows you to
convey the assumptions that you need and the story that you need to tell the truth or your
representation of it”. We illustrate how the model highlights certain explanatory factors while it hides
others (see Figure 6). In doing so, the causal mechanism of “deciding” by applying the PO-model (see
Figure 5) brings about a supply-side focus in policy-making.
27
Figure 6: The PO-model highlights and hides certain factors. Authors’ illustration.
Taking the fact that economic growth serves as a meta-goal in European economic policy as given, the
first and foremost question is: how to foster economic growth? In this context, the PO-model
highlights the importance of supply-side factors, while the possibility of demand-led growth is absent
in its mechanics. In other words: factors influencing aggregate demand like public spending, the
personal distribution of income, the specificities of international trade or the relative importance of
speculation vis-à-vis real sector investment are systematically neglected. This bias is also mirrored
by contemporary austerity policies. It is well documented that the use of the PO-model has facilitated
pro-cyclical fiscal policies from 2010 onwards (e.g. Klär 2013; Truger 2015; Heimberger and Kapeller
2017; Fatas 2019). Specifically, as downward revisions in economic growth and employment
materialized during crisis times, the end-point bias associated with the underlying model-based
statistical filtering gained relevance: the increase in actual unemployment rates also pushed the
Commission’s model-based estimates of ‘structural unemployment’ upwards (see Heimberger and
Kapeller 2017, p. 915; Palumbo 2015, p. 296). As a consequence, the Commission underestimated the
extent to which the production factors in crisis-ridden economies were underutilized, which, in turn,
increased estimates of the ‘structural’ deficitwhich put more pressure in the respective governments
to reduce ‘excessive structural deficits’ by implementing fiscal consolidation measures. In the euro
area, the Commission’s crisis-induced upward revisions in the ‘structural deficit’ were most
pronounced for the countries hit hardest by the crisis (see Heimberger and Kapeller 2017, p. 916-919).
Importantly, the pro-cyclical bias introduced by the neoclassical PO-model into EU fiscal policy-
Mechanisms highlighted
Growth is driven by supply
factors (neoclassical view)
The neoclassical PO-model
Supply-side paradigm:
Y = Lα K(1-α) TFP
Mechanisms hidden
Increase potential output!
by implementing (labor)
market deregulation
(e.g. curb employment!
protection, cut minimum!
wages, decentralize wage!
bargaining)
Production factor Labor (L): NAWRU model!
Production factor Kapital (K): exogenous!
α: exogenous, constant!
Total factor productivity (TFP): residual
Monetary policy
Distribution policy
Industrial policy
Growth is driven by demand
factors (Keynesian view)
28
making stands in stark contrast to a Keynesian view, in which fiscal policies should be anti-cyclical,
i.e. expansionary during recessions (to promote growth and employment) and restrictive in cyclical
upswings (to curb unsustainable macroeconomic dynamics). Hence, in the specific context of post-
crisis policies the causal mechanism of the model as a device for deciding was especially pronounced
as model-outcomes directly translated into stricter fiscal constraints for crisis-ridden countries.
Obviously, the use of the PO-model as a device for deciding was not the only factor pushing for fiscal
austerity in Europe. For example, recent literature has emphasized that professional networks may
play an important role in shaping the policy-makers’ positions concerning the role of fiscal policy (e.g.
Dellepiane-Avellaneda 2015; Helgadottir 2016; Ban and Patenaude 2019). As it seems clear from the
outset that the impact of models is unlikely to solely determine some outcome, our theoretical
framework explicitly allows for other factors to also affect those outcomes (see Figure 2 and Figure 5).
However, as the Commission drew on the potential of the PO-model to exert power, it clearly
contributed to a post-crisis focus on bringing down ‘excessive structural deficits’ by means of fiscal
consolidation (Heimberger and Kapeller 2017).
Subsequently, policy-makers regularly ask: how to foster supply? As currently set up, the PO-model
and its accompanying framing tend to emphasize labor market conditions over other aspects impacting
on production, because the other relevant variables are either assumed to be constant (functional
income distribution as represented by 𝛼),13 exogenously given (𝛼 as well as capital 𝐾) or treated as a
residual of all other components of the model (Total Factor Productivity, in short: 𝑇𝐹𝑃). This feature
is stressed several times in the technical papers, e.g. by “highlighting the close relationship between
the potential output and NAWRU concepts” (Havik et al. 2014, p. 5). By assigning the NAWRU a
core role, the model implicitly discounts a series of other policy options. In particular, conceptualizing
productivity as a (catch-all) residual variable makes it difficult to think about industrial policies or
specific investment strategies within the model framework. Similarly, monetary policy and
13 In the Commission’s interpretation, 𝛼 and (1 - 𝛼) as included in the neoclassical production function (see the middle
column of Figure 6) are the constant output elasticities of labor and capital, respectively representing by how many
percentage points output changes when the respective input is increased by one percentage point: “under the assumption of
constant returns to scale and perfect competition, these elasticities can be estimated from the wage share” (Havik et al. 2014,
p. 10).
29
distributional policies relating to the functional income distribution are rendered invisible by the
model; both related variables (capital 𝐾 and the factor shares 𝛼 and 1𝛼) are assumed to be
exogenous. Furthermore, capital 𝐾 is considered to be insensitive to the business cycle and per
definition always fully utilized as capital supply automatically adjusts itself to productivity conditions
(see Havik et al. 2014, p. 11). Hence, the model tends to hide and discount a series of important
aspects, while it highlights a political frame that focuses on increasing potential growth by promoting
the contribution of labor as a production factor.
Finally, policy makers will ask: how to promote employment? We have documented that
unemployment is transformed into the NAWRU by using statistical filtering models, and the
corresponding model-based NAWRU estimates are deemed to be a valid proxy for ‘structural
unemployment’, which in turn is determined by “institutional factors and fiscal measures
(unemployment benefits, tax rates) which influence the reservation wage” (Orlandi, 2012, p. 1). The
implication for policy makers is to conduct labor market reforms and adopt other measures that
increase the workerswillingness to accept job offers that otherwise would be unattractive. Eventually,
the PO-model comes with a very specific policy-implication, namely to increase labor market
flexibility, i.e. making it easier for firms to hire and fire. Obviously, other factors also contribute to the
policy outcome of a focus on labor market flexibility geared towards improving the supply-side of an
economy. In particular, the literature has emphasized a long-standing focus by international
organizations such as the European Commission, the International Monetary Fund and the OECD on
the so-called NAIRU story, according to which high ‘structural’ unemployment rates are exclusively
determined by overly protective labor market institutions, which should be deregulated (e.g.
Stockhammer 2008). However, the role of the PO-model as a device for “seeing and deciding” in
fostering a supply-side focus on labor market deregulation is arguably underappreciated as the model
has gained importance over the last ten years. This is not surprising, since gaining insights into how
the use of the PO-model brings about a supply-side focus requires a deeper engagement with the
technical details of how the Commission models ‘structural’ unemployment in the process of
estimating ‘potential output’ (Heimberger et al. 2017). As will see in the next chapter, an important
consequence of the close alignment between neoclassical paradigmatic priors and paradigm-
30
compatible policies is that such technical idiosyncrasies feed back into the political process and vice
versa.
6.3 Negotiating the PO-model: The technical and the political
The PO-model effectively fosters a process in which “the technical and the political blur together”
(FC2). This point can be illustrated by pointing to the phenomenon that ‘structural unemployment’
estimates (proxied by the NAWRU) often tend to move relatively close to actual unemployment
(Figure 7), which is due to the end-point-bias of the Kalman-filter that assigns a disproportionate
impact to the last observations. Acknowledging that the Commission’s ‘structural unemployment’
estimates are of contested quality (e.g. Constancio 2018) stands in contrast to the political discourse in
which high NAWRU estimates are understood as prime indicators for ‘rigid’ labor market conditions
(Orlandi 2012) although labor market institutions do not directly enter the relevant NAWRU-model,
neither as components of the production function nor in the accompanying statistical calculations
(Heimberger et al. 2017). This interplay between technical idiosyncrasies and political rationalizations
can be used to translate paradigmatic preferences into policy action: in times when “the technical
demands on ministers definitely increased” (FC1), cases of diverging interpretations of the
Commission’s model estimates are no exception.
A similar argument can be made with regard to another feature of the Kalman-filter, which leads to
revisions of all past estimates whenever new data is entered. These ex-post revisions are partially
drastic as indicated in Figure 7, which compares the ex-post NAWRU estimates for Spain with real-
time estimates. The difference between these two series is that the Commission calculated the former
by incorporating all relevant data up to 2018, while the latter shows the estimates produced based on
the data that were available and inserted into the model in the respective year. It can be seen that real-
time estimates deviate markedly from ex-post estimates, which raises doubts about the reliability of
the underlying statistical filtering procedure (Heimberger, Kapeller 2017).
31
Figure 7: Real time and ex-post NAWRU estimates for Spain, 2007-2018, Source: European Commission; own
calculations. Real-time NAWRU estimates show the Commission’s NAWRU estimate from the Autumn forecast of the
respective year. The ex-post estimates are based on the Commission’s Autumn 2018 forecast. Revisions were
calculated as the difference between ex-post and real-time estimates. Note: The European Commission uses the
NAWRU as a proxy for ‘structural unemployment’ (see section 5.2).
All interviewees see revisions of model estimates as a serious flaw, but you cannot get rid of it
(EC2). Member states partially feel restricted in their political leeway as the fiscal framework assigns
“a lot of power to the people that estimate potential outputs” (WG1). Revisions of model estimates
affect the political evaluation of a country’s economic situation since high estimates of ‘structural
unemployment’ are interpreted as an indication for significant labor market rigidities. Hence,
modifications of the underlying NAWRU model are also the target of specific political demands,
which is evident in Spain’s calls for changes to the NAWRU model (e.g. Dalton 2013). On a technical
level, Spain simply demanded modifications of the underlying Kalman-filter model, namely the
introduction of a different statistical assumption in estimating unobservable variables in the model.14
On a theoretical level, these rather minor technical modifications in the statistical setup can be
represented as a shift in how the relationship between unemployment and inflation is being modeled
14 In statistical jargon, the discussion was about the introduction of a second-order autoregressive process instead of a first-
order autoregressive process in the estimation of (unobservable) unemployment gaps (e.g. Gechert et al. 2016), which are
defined as the difference between actual unemployment and ‘structural’ unemployment.
-5!
0!
5!
10!
15!
20!
25!
-5!
0!
5!
10!
15!
20!
25!
2007!2008!2009!2010!2011!2012!2013!2014!2015!2016!2017!2018!
Revision of NAWRU estimates (ex-post vs. real-time) in percentage points!
NAWRU (unemployment rate) in % of active population!
Year!
Real-time NAWRU estimate!
Ex-post NAWRU estimate!
NAWRU revision (ex-post vs. real-time)!
Actual unemployment rate!
32
(EC 2014).15 Finally, on a political level, these technical model modifications were of prime
importance for the Spanish economy, as estimates based on the traditional NAWRU-specification
indicated that ‘structural unemployment stood close to the actual unemployment rate of above 20%.
With Spanish representatives pushing hard for a change in the NAWRU model and some Northern EU
countries unwilling to bring about political compromise, interviewee EC1 recalls an “agreement on
the technical level for some time” but there was “a lot of resistance” at the level of political officials
in the EPC. In the end, “the technical experts won out” (interviewee EC1). Crucially, the ‘technical’
agreement on model modifications could only be reached in 2013 under the condition that each
member state would still be allowed (for some time) to decide on its preferred NAWRU estimation
method. The example of Spain indicates that when it comes to negotiating fiscal policy in the existing
fiscal regulation framework, some parties may be unsatisfied with the model’s political outcomes, and
in such cases the technical aspects of the model become the target of political demands (see also
Figure 5).16
7. The concealed impact of the PO-model
The last sections have shown that the PO-model plays an essential role in EU fiscal governance
processes: it maps paradigmatic priors onto political action and introduces technical properties into the
policy process that favor supply-side policies. As a consequence, it becomes very difficult to
politically challenge the PO-model’s technically sophisticated and legally binding estimates. The
question how the PO-model and its estimates of potential output and ‘structural deficits’ in EU
member states are perceived in the broader European policy debate, however, has not yet been
addressed. In this respect, we unsurprisingly find that only selected technical aspects enter the
respective public debate. This finding is based on analyzing media articles: to evaluate the role of the
PO-model in media discourse, we compiled a database of articles published in five European quality
15 In economic jargon, this change in the statistical setup has been interpreted as a shift from a “traditional Phillips curve” to a
“New-Keynesian Phillips Curve”, as the new parameter introduced is sometimes assumed to represent the presence of
‘rational’, forward looking expectations (EC 2014).
16 Spain is not the only EU country that has voiced concerns about the model-based estimation of ‘structural’ deficits.
Another well-document episode took place in early 2016, when the finance ministers of eight EU countries (Italy, Spain,
Latvia, Lithuania, Luxembourg, Portugal, Slovenia and Slovakia) addressed a letter to the European Commission, in which
they expressed their concerns about the PO-model, arguing that "[m]ore substantial doubts have been raised about the
commonly agreed methodology and it has also been suggested to complement the output gap with other indicators […] we
support an intensification of the technical work on the matter" (Ciucci and Zoppe 2016, p. 6).
33
newspapers between 2010 and 2015 that contain “structural deficit” or synonyms (e.g. “cyclically
adjusted budget balance”).17 Of the compiled 440 articles (see Table 2) only 2.7% made any reference
to the underlying PO-estimation methodology (Category 3, e.g. by mentioning “potential output”).
While 23.2% of the articles included only isolated numbers on the Commission’s estimates (Category
2, e.g. by mentioning “1% structural deficit”), 74.1% of the articles mentioned neither the estimation-
methodology nor concrete structural deficit numbers (Category 1).
Table 2: Articles on the structural deficit and depth of PO-model coverage in five quality papers, 2010-2015.
Explanations of categories: Method: reference to the underlying PO-estimation-methodology. Figure only: Isolated
numbers on the structural deficit estimations. No reference: ‘structural deficit’ is mentioned in general without
referring to estimation-methodology or concrete structural deficit numbers.
Newspapers
Articles
(count)
No
reference
Cat. 1
Numbers
only
Cat. 2
Method
Cat. 3
Economist
16
31.2%
56.3%
12.5%
Financial Times
162
87.7%
11.7%
0.6%
Frankfurter Allgemeine Zeitung
108
35.2%
58.3%
6.5%
Die Zeit
138
91.3%
8.0%
0.7%
Le Monde Diplomatique
16
93.8%
0%
6.2%
Total
440
74.1%
23.2%
2.7%
To evaluate overall coverage over time, we normalized the data with respect to the number of issues
published per year. In the year 2011, a fictional subscriber of all five newspapers found articles in
16.1% of the issues of these five newspapers. In 2012, the coverage rose to 43.4%, yet the increase
was not accompanied by more in-depth accounts (see Figure 8). In the following years, coverage fell
to a low of 5.1% in 2015.
17 Articles that refer to regional or domestic fiscal policies and lack any reference to European aspects were excluded. Le
Monde Diplomatique was analyzed in the German language edition.
34
Figure 8: Newspaper articles in five newspapers (Economist, Financial Times, Frankfurter Allgemeine Zeitung, Die
Zeit and Le Monde Diplomatique): Coverage of structural deficit in articles (normalized by using the number of
issues per year). The numbers represent an unweighted average of articles per issue in the five newspapers.
Explanations of categories: “Method”… reference to the underlying PO-estimation-methodology; “Figure only”…
isolated numbers on structural deficit estimations; “No reference”… ‘structural deficit’ mentioned in general without
referring to estimation-methodology or concrete structural deficit numbers.
This media analysis shows that even quality newspapers generally fail to provide in-depth coverage on
the role of technicalities in the PO-model in EU fiscal governance. The lack of media coverage on
essential aspects of the PO-model provides empirical evidence for the theoretical argument in section
2, where we pointed out that economic models mediate between economic paradigms and policy
programs by providing simplified representations of complex economic processes, while their role
remains largely hidden from the general public. Although the appropriateness of the PO-model’s
estimates for specific countries has been contested, the relevant discussions are largely absent from the
broader policy debate, which is either due to ignorance regarding the political importance of the PO-
model or due to a lack of effort to translate technical model details into a language that can be
understood by the general public. Notwithstanding the underlying reasons, the consequence is that
there are only very limited discussions about how (unelected) actors who are shaping the technical
details in the PO-model wield power over democratic fiscal policy-making in the EU’s member states.
14.5%!15.3%!
39.0%!
5.9%!8.3%!
4.0%!
2.9%!
0.4%!
2.3%!
2.8%!
3.5%!
1.0%!
0.5%!
0.4%!
2.1%!
0.3%!
0.1%!
0.1%!
0%!
10%!
20%!
30%!
40%!
2010!2011!2012!2013!2014!2015!
Coverage of 'structural deficit' in articles of five newspapers (in
%)!
Year!
Method (Cat. 3)!
Figure only (Cat. 2)!
No reference (Cat. 1)!
35
8. Conclusions
By extending the framework provided by Campbell (1998), this paper has proposed a theoretical
innovation to the existing ideas-vs.-interests literature: we have introduced economic models as a
specific kind of economic idea, that can serve as a transmission device between economic paradigms
and policy programs. We argue that models are potential carriers for political convictions and, hence,
allow actors drawing on such models to wield power in political decision-making under certain
conditions. In doing so, we focused on the European Commission’s potential output model, which is
crucial for fiscal policy coordination in Europe, as it has a legal basis in the EU’s fiscal regulation
framework.
We traced the potential output model’s historical origins and technical specificities, which allowed us
to analyze the conditions and mechanisms under which this exceptional model has been used by
European policy-makers to bring about political outcomes. In essence, we document that the PO-
model translates neoclassical paradigmatic priors into political action. We improved the understanding
of the potential output model as a device for “seeing and deciding” (Hirschman and Berman 2014, p.
779), which maps theoretical arguments onto political programs in a way that puts the focus in
political consultations on the supply-side paradigm, which has supported a political agenda of (labor)
market deregulation. We conclude that substantial insights can be gained from analyzing the
seemingly arcane nuances of economic models, with the goal of gaining a better understanding of their
actual impacts on policies.
Although generalizations of our findings to other economic models should not be drawn light-
heartedly and will certainly require qualifications, our study arguably points towards a future research
agenda. Given the rising importance of models in different areas of political decision-making, there
are two questions of special relevance. First, how and under what conditions do models cause political
outcomes? Second, how can particular models be identified as carriers of certain paradigmatic priors
and convictions? To answer these questions, a future research agenda should be characterized by an
extended analysis of selected (economic) models to shed more light on the conditions that allow actors
drawing on these models to exercise power in political decision-making and the consequences of the
36
model’s activation. For example, recent research has pointed out that models represent an important
factor in monetary policy decisions (e.g. Holmes 2014; Christophers 2017; Acosta and Cherrier 2019),
but “the field of central bank macroeconomic modeling has been largely ignored” (Srnicek 2018, p.1)
when it comes to analyzing the role of relevant models in decision-making processes. Similarly, the
analysis of how model estimates shape political processes remains underdeveloped in other areas such
as trade policy (e.g. De Ville and Siles-Brügge 2015), the global governance of risk in the financial
sector (e.g. Kranke and Yarrow 2018), or climate policy (e.g. Pindyck 2013). Our study has aimed at
making a contribution towards an interdisciplinary research agenda that aims at gaining a better
understanding of the nature of decision situations in economic contexts (e.g. Beckert 2016) by taking
the potentially powerful role of economic models in policy-making more seriously.
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... Studying this contestation offers a new angle to the analysis of the post-crisis scenario in Italy, one that goes beyond the description of structural dynamics but looks at the effect that a specific idea of handling fiscal policy through strict and technical rules has generated. Moreover, the output gap itself represents a crucial element in the renewed European fiscal framework, since it provides a foundation to the whole new architecture of fiscal monitoring (Heimberger, Huber, and Kapeller 2019). Having been the center of widespread criticism and discussion, the output gap reveals the complexity of making a very political side of policymaking technical. ...
... In the European context, the methodology for estimating output gap is decided within the Output Gap Working Group (OGWG), a permanent working group of DG ECFIN, where delegates -technocrats -from each country's finance ministry discuss technical aspects of the model and reach the so-called "commonly agreed methodology. " This methodological agreement represents a set of rules and parameters that should be able to accommodate all countries' needs and specific economic structures in the making of this indicator (Heimberger et al. 2019). The group has existed since the early 2000s and has focused on improving the calculation of this indicator, even before it became central for fiscal monitoring. ...
... On top of this technical issue, the Commission relates the trend component of the NAWRU to the concept of the natural rate of unemployment -at which wage inflation does not accelerate -taking a somewhat debatable approach to economic theory. As, according to theory, the natural rate should only reflect labor market rigidities, the actual approach of the Commission, using the Kalman filtered NAWRU as a proxy, estimates it as a mix of structural and cyclical factors (Heimberger, Huber, and Kapeller 2019). Moreover, using the NAWRU as a policy target is in and of itself a disputable exercise that has received many critiques in recent years: the extreme uncertainty that comes with the estimates (very sensitive to the forecasts horizon and other technical aspects) as well as the empirical evidence that shows rather an insensitivity of wage inflation to the actual unemployment rate, has cast serious doubts on the possibility of using such a measure for structural unemployment (Fioramanti et al. 2020;Stirati 2016). ...
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The sovereign debt crisis triggered a process of reforms in European economic governance that pushed for technocratic handling of budget decisions following standardized procedures, target measures, and indicators for fiscal monitoring. This shift, aimed at producing more stability and less conflict in budget decision-making, transformed fiscal policy, producing a new type of technocratic fiscal politics. These new technocratic instruments impact on national policymaking, yet little is known about the processes and actors behind their constitution. Scholarship on the policy response to the euro area crisis has highlighted the role of national interests but neglected the role of expertise in negotiating highly technical fiscal policies. A key measure in this new technical apparatus, the output gap, has been at the center of a heated contestation between Italian and European institutions over the 2014– 2019 period. Taking the case of the Italian output gap, this paper traces the unfolding of the dispute around the methodology for estimating potential output and clearly reveals the new centrality of expertise. The paper argues that rather than producing a less conflictual policy environment and a depoliticizing of fiscal decisions, technocratic fiscal politics has reshaped discussions around budgetary politics. This reshaping extends and transforms actor constellations and venues of fiscal decisions, giving a larger role to technocratic experts.
... For a critical discussion of the EC's potential output model, see Fatas (2019) andHeimberger et al. (2020). ...
... For a critical discussion of the EC's potential output model, see Fatas (2019) andHeimberger et al. (2020). ...
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... The output gap is defined as the difference between actual and potential output (typically expressed as percentage of potential output), where the latter represents what the economy should be able to produce in the absence of higher inflationary pressures (e.g.Havik et al. 2014). Potential output is routinely estimated by using statistical filtering methods (e.g.Coibion et al. 2018;Heimberger et al. 2020), where the trend component of actual output excludes the cyclical component of GDP and is ...
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This paper analyses (age-adjusted) employment rates by gender and education. We find that male female gender gaps and high-low education gaps in employment vary markedly across European Union (EU) countries and regions, with larger gaps existing in Eastern and Southern Europe than in Nordic and Continental EU countries. We estimate that closing existing education gaps in employment between high and lower education levels would raise the employment rate in the EU for the year 2022 by 10.6 percentage points, whereas closing the gender gaps between men and women would lead to an increase of 2.5 percentage points. At the same time, closing both the gender and education gaps would raise the EU employment rate from 76% to 89% of the population. Furthermore, we provide new evidence on the cyclical behaviour of employment gaps, finding that gender gaps are procyclical. While female employment rates tend to be more resilient than male employment rates during economic downturns, male employment rates tend to grow at a faster pace than female employment rates during upswings. In contrast, education gaps are more countercyclical, as employment risks are more strongly concentrated where education is low.
... The book also forces us to think critically about how the model world is translated into 'actionable knowledge' in the real world that it claims to represent (Watson 2014). This includes the implications of using deductive reasoning to determine economic priorities (Abdelal et al. 2010), and how abstract models reproduce meanings, understandings and discourse about the economy (Heimberger et al. 2020). These debates could not be timelier. ...
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This contribution to the symposium situates Clift’s (The office of budget responsibility and the politics of technocratic economic governance, Oxford University Press, Oxford, 2023a) book in wider scholarship on ‘epistemic politics’ in comparative and international political economy. I argue that the book serves to foreground the power and politics of economic knowledge and technocratic expertise in three ways: (1) by unpacking the ‘everyday’ life of ideas as grounded in material processes of knowledge production; (2) lifting the veil on the ‘model world’ of economic policy by analysing the epistemological foundations of technocracy; and (3) deconstructing the politics of crisis by revealing the OBR’s critical role in interpreting and narrating developments like Brexit and Covid. The rest of the paper is devoted to reflecting on the core theme of the book—technocratic economic governance—focussed on three related issues: problematising technocracy and technocratic expertise; the dynamics of learning and accountability; and the importance of historicising economic governance since 2010.
... Additionally, the NAIRU serves as a proxy for structural unemployment when estimating potential output and cyclically-adjusted budget balances (e.g. Heimberger et al. 2020). Hence, the NAIRU is a key benchmark when it comes to monitoring whether the labour market is so tight that it will put upward pressure on inflation. ...
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