Neutral real interest rate in an open and small economy: The case of Costa Rica

This study examines the sustainability of public debt in Himachal Pradesh using a Fiscal Reaction Function (FRF). It evaluates whether the state government’s primary balance is adjusted in response to changes in debt, using annual data for the period 2004-05 to 2023-24. The baseline model is estimated using ordinary least square (OLS) and is extended to incorporate macroeconomic conditions through output gap and structural shock through COVID-19 dummy variable. The results show a positive and statistically significant response of primary balance to lagged debt across model specifications, suggesting that fiscal policy has been responsive to rising debt levels. The inclusion of output gap and COVID-19 does not alter core relationship, rather it strengthens the evidence that fiscal behaviour is largely structural and not event driven. The study also examines debt stabilisation condition using interest rate – growth differentials and finds out that macroeconomics condition has been favourable for maintaining stable debt trajectory. There is no evidence of fiscal fatigue over the sample period. However, these findings are interpreted in the context of institutional support through the revenue deficit grant (RDG), which are no longer continued by Finance Commission. Overall, the result suggests that public debt in Himachal Pradesh has followed a broadly sustainable path during the study period, although maintaining this will depend on continued fiscal discipline and favourable macroeconomic conditions.

This paper uses time-series data from 1996Q1-2021Q4 to examine the determinants of non-performing loans (NPL) in Namibia’s banking industry and test for causality between NPL and its determinants. To accomplish this, the Autoregressive Distributive Lag (ARDL) and the Vector Autoregressive (VAR) pairwise Granger causality modelling approaches are employed. The findings reveal that in Namibia, NPL is influenced by a host of factors, including its own past values, output gap, unemployment rate, housing prices, return on assets, return on equity, lending behaviour, loan-to-deposit ratio, loan growth, narrow money supply, broad money supply, net foreign assets, repo rate, interest spread, deposit rates, private sector credit extension, oil prices, COVID-19 pandemic crisis, stock market prices, regulatory quality, government effectiveness, and the rule of law. The Granger causality test results indicate strong unidirectional causality running from past values of NPL, unemployment, housing prices, capital adequacy ratio, loan growth, and oil prices to NPL. Additionally, a bidirectional causal relationship exists between the repo rate, lending rate, and NPL. The policy implications emanating from this study need to be addressed in order to ensure the stability of the country’s financial system.

Finance, asset prices, and the business cycle: evidence on the reliability of real-time output gap estimates

ABSTRACT This article investigates how efforts to depoliticise fiscal governance in the European Union have paradoxically contributed to its enduring politicisation. In the wake of the sovereign debt crisis, European Union policymakers introduced increasingly technical fiscal rules, centred on complex indicators such as the output gap, to insulate decision-making from political contestation. Yet, as the 2019 Italian output gap controversy illustrates, these very mechanisms became focal points of political conflict. Drawing on theory-testing process tracing, the article shows how technocratic governance imported the instability of expert disagreement into European Union policymaking, generating public scientific controversies. These disputes allowed political actors to contest the rules themselves, blurring the line between technical and political decision-making. The analysis advances the literature by identifying how EU level depoliticisation strategies can generate more politicisation by embedding technical instability in policy areas supposedly considered neutral. This (de-)politicisation feedback loop shows how technocratic governance can perpetuate rather than resolve political conflict.

This paper studies how US inflation dynamics have evolved as labor-market institutions weakened and expectations became more central to price-setting. Using quarterly data from 1984Q1–2023Q4, we estimate Phillips-Curve-style regressions that allow inflation to depend on expected inflation, lagged inflation, and interactions between unemployment and union density, and we complement these results with a multivariate vector autoregression (VAR) to trace dynamic responses. Three findings emerge. First, inflation is best explained by a joint expectations–persistence component: expected inflation, lagged expectations, and lagged inflation together account for substantially more variation in inflation than specifications based on unemployment or the output gap alone. Second, interaction between the unemployment–union-density is economically meaningful, consistent with weaker collective bargaining dampening the wage channel and contributing to a flatter inflation–slack relationship. Third, VAR impulse responses indicate that expectation shocks transmit to inflation primarily over short horizons, while inflation persistence remains a dominant propagation mechanism. These results imply that inflation stabilization increasingly depends on anchoring expectations and understanding labor-market structure, rather than relying on slack measures as sufficient statistics for inflationary pressure.

Diversification and specialization represent two strategic pathways, with differing implications for economic performance, risk management, and resilience. Using survey data from 417 prawn farms in Bangladesh, this study examines the economic effects of joint production in integrated extensive gher systems combining prawn, carp, rice, and vegetables. An output-oriented stochastic distance function with a translog (TL) specification is used estimate technical efficiency, elasticities, and economies of scale and scope. Results indicate an average technical efficiency score of 0.70, indicating a 30% potential output gap. We find decreasing returns to scale (scale elasticity ≈0.52), with seed cost exhibiting strong negative efficiency effects and feed cost showing significant positive contributions. Among income sources, aquaculture income has the largest positive effect on efficiency, followed by other on-farm income. Off-farm income, while important for household resilience, shows no positive efficiency effect and may compete with farmers’ managerial focus. Scope economies are strongest when aquaculture is combined with other on-farm activities (e.g. rice and vegetables), highlighting the benefits of targeted diversification within this setting. Our findings suggest that while on-farm diversification can enhance cost efficiency and resilience, specialization remains relevant for optimizing certain inputs and managing operational scale.

ABSTRACT Oil price shocks play an important role in macroeconomic stability. This paper examines nonlinear effects of oil price shocks on inflation and output gap between active and passive monetary policy regimes. The novelty of this paper is that we estimate the Markov-switching Rational Expectation New Keynesian model augmented with oil prices for China. The results show that the impact of oil price shocks on inflation and output gap is large when the oil price volatility is high. The Chinese monetary policy, however, mitigates oil price shocks, depressing the effects of high-volatility oil price shocks on inflation. We also provide estimates of the inflation-oil price elasticity and output gap-oil price elasticity in different monetary policy regimes. Our findings yield implications for monetary policy regimes and oil price shocks in the short- and long-run for China.

The research aims to estimate the fiscal reaction function in Iraq as a quantitative tool to measure the government's response to public debt movements and assess its commitment to achieving financial sustainability. The study adopted the quantitative analytical approach in analyzing annual time series data using the Autoregressive Distributed Lag (ARDL) model during the period (2005-2023) in addition to single root and cointegration tests to analyze the relationship between the primary balance to GDP ratio and a number of macro variables, such as the public debt to GDP ratio, the ratio of oil revenues to total public revenues, the government spending gap in real terms, and the output gap in real terms. The research assumed that fiscal policy responds to the rise in public debt by improving the primary balance of the budget, thus ensuring financial sustainability in the long term. The study found that fiscal policy in Iraq does not respond effectively to public debt levels, reflecting a lack of fiscal engagement with debt accumulation. This is an indicator of deficiencies in the public debt management framework and a direct threat to the sustainability of public finances in the short and long term. The study concluded that a proactive fiscal policy should be adopted within a medium-term framework, aiming to reduce dependence on oil, diversify revenue sources, and enhance the resilience of public finances in the face of shocks.

Abstract This paper introduces a weighted output gap measure for Switzerland that combines univariate filters, multivariate filters, and production function approaches. Published quarterly by SECO since 2019:Q4, the series provides a historically consistent and robust indicator of cyclical conditions. Using an inflation forecasting framework, the weighted gap achieves forecasting performance comparable to leading individual methods; although it does not outperform them uniformly, it provides a balanced and reliable signal that mitigates method-specific weaknesses. These properties make it a useful benchmark for business cycle analysis and policy applications.

This paper in an empirical attempt to study implicit disagreement among MPC members of central banks contained in the minutes of the MPC meetings for three Eastern European economies, viz., Poland, Czech Republic and Hungary. NLP sentiment analysis techniques, specifically a BERT model trained and fine-tuned on the corpus of the text of the minutes of the MPC meetings of the three countries, are applied to extract sentence level sentiment scores in terms of hawkish, dovish or neutral sentiment which are then used to calculate meeting level Disagreement Index(DI) variable by taking the Standard Deviation of the sentence level sentiment scores. We augment the standard Taylor rule formula for setting monetary policy rates with this DI variable and see that it impacts the interest rate negatively, suggesting that higher implicit disagreement might restrain the MPC members from being too hawkish which might be influenced by higher uncertainty about economic conditions, especially fears of a looming recession. So, we find that disagreement has a significant impact, even implicit disagreement, on the policy rate decisions of the MPC members. This offers insights into why central banks might hesitate to raise rates immediately in face of higher inflation or output gap pressures.

ABSTRACT This paper investigates the implications of output gap uncertainty for the conduct of fiscal policy using a small‐scale macroeconomic model with boundedly rational agents. Specifically, agents use an adaptive updating mechanism to approximate the unobservable potential output that suffers, similarly to the Hodrick and Prescott (1997) filter, from an end‐point bias. This generates an unintendedly procyclical fiscal policy that affects the government's credibility and by extension the sovereign risk premium. Our simulations highlight the importance of this so‐called bond vigilantes channel, as well as of the government's credibility among financial markets, for the sustainability of government debt and for macroeconomic stability.

Abstract Estimating output gaps is challenging for emerging Asian economies due to limited data availability and the potential effects of outliers. I apply the Beveridge-Nelson (BN) filter, comparing it with commonly used filters—Hodrick-Prescott (HP), Christiano-Fitzgerald (CF), and Hamilton—across four emerging Asian economies and argue that it provides more reliable and informative estimates than alternative methods. When benchmarked against narrower indicators of slack, BN filter output gap estimates provide a more informative indicator than capacity utilization and unemployment, given longer data coverage and controlling for long-run structural changes. I also document two systematic results for these economies. First, cyclical consumption is more volatile than the output gap. Second, decomposing GDP growth volatility shows that less than one-third of growth fluctuations is accounted for by movements in trend growth, with most variation attributed to the cyclical component. Taken together, these findings contrast with the interpretation in Aguiar and Gopinath (2007) that shocks to the trend are the primary driver of fluctuations in emerging economies and departs from their view that the “cycle is the trend.” Crucially, the BN filter estimates are also subject to smaller and less frequent revisions when faced with large changes in economic conditions, which benefits real-time policy decision-making.

This paper introduces a novel application of the Updated Okun Method to estimate fiscal multipliers. By leveraging Okun's Law to compute potential output and the output gap, we construct a new measure of the fiscal stance that improves transparency and interpretability. Applying this approach to France and Italy, we find that both economies were operating below full potential for most of the sample period, and that fiscal policy was more contractionary than standard estimates suggest. Our analysis reveals significant differences in fiscal multiplier effects across the two countries, with evidence of state-dependence in France, where fiscal policy is more effective during periods of economic slack, while no such variation is observed for Italy. These findings underscore the importance of aligning fiscal policy with economic conditions, particularly in the context of public debt sustainability debates.

ABSTRACT The international co‐movement of interest rates reflects correlated business‐cycle fluctuations, largely driven by demand shocks. Monetary policy in advanced economies follows domestic mandates—inflation and the output gap—and does not respond to foreign policy shocks. We derive this result from a Bayesian structural panel vector autoregression with informative priors, homogeneity restrictions on contemporaneous relations, a hierarchical Minnesota prior with cross‐sectional shrinkage, and a factor structure for structural shocks.

ABSTRACT Assessing the stage of the financial cycle has become an established element of policy analysis, when evaluating the cyclical position of the economy. This paper examines whether including financial variables enhances euro area output gap estimation and its cyclical properties. While financial variables may, in principle, help capture financial imbalances that precede economic downturns, the empirical gains from their inclusion remain limited and uncertain. This paper presents a suite of output gap estimates incorporating financial variables, based on both small unobserved components models and a large unobserved components model that follows a production function approach. The results show that financial variables, which co-move strongly with the output cycle, can sometimes improve output gap estimates. However, these improvements are modest in magnitude, sensitive to the choice of financial variables, and more pronounced at the country level than at the euro area aggregate.

This paper will look at the value and conduct of fiscal multipliers in emerging economies using a nonlinear analytical framework, which will provide an evaluation on policy effectiveness under various macroeconomic conditions. Although traditional linear approaches presume that multiplier impacts are always constant, mounting evidence indicates that fiscal policy can have different impacts across economic cycles, levels of debt as well as financial limits and external susceptibility. This study examines the fiscal expansions to understand whether they lead to asymmetric effects (during recessions and expansions) and threshold conditions (inflation, public debt, output gaps) to modify the channel of transmission of fiscal shocks. The study employs nonlinear econometric models of threshold regression and regime switching model to estimate a state-reliant output response of government spending and taxation variations using panel data of selected emerging markets over a multi-decade period. The results show that fiscal multipliers are higher in times of economic recessions as the monetary policy room is narrow, and the financial markets are not experiencing downward trends. Multiplier effects, in contrast, fall in a high-debt or high-inflation regime, in which policy transmission is undermined by crowding-out effects and credibility problems. The analysis also shows heterogeneity among countries which is manifested by the variations in institutional quality, fiscal credibility, trade openness, as well as exchange rate flexibility. These findings underscore the need to design policies within the context, as opposed to use of standard multiplier presumptions. The research adds value to the literature by providing empirical data that fiscal effectiveness in the emerging economies is nonlinear and depends on macroeconomic regimes. The policy implications are that the countercyclical fiscal policies become more effective when they are taken in supportive macroeconomic conditions and credible fiscal frameworks. Adaptive fiscal policies based on nonlinear dynamics have the potential to improve the results of stabilizing the situation and achieve sustainable economic growth in the emerging markets.

High-power, high-efficiency multibeam klystrons (MBKs) serve as essential RF power sources for large-scale accelerator facilities, where high-efficiency energy extraction from multiple beams without reflected electrons is critical for achieving stable and efficient operation. However, in practical MBK designs, the electric field distribution within the output cavity gap often becomes nonuniform due to the asymmetrical loading introduced by the coupling port. This field distortion leads to differentiated beamlet deceleration, resulting in reflected electrons in certain beamlets and degraded RF conversion efficiency. Based on the design of a 3-MW S-band high-efficiency MBK, this work proposes a method to improve electric field uniformity by shifting the ferrule region toward the coupling-port side and by introducing tuning rods on both the coupling-port side and the opposite side, arranged parallel to the beam tunnels. This hybrid design improves the field uniformity in the output gap from 53.8% to 92.1%, thereby enabling optimal beam–wave interactions. 3-D CST/PIC simulations demonstrate that the proposed method increases efficiency from 45.1% to 62.7% compared with a conventional reentrant output cavity. Furthermore, the fabricated new cylindrical reentrant output cavity structure was experimentally evaluated using the perturbation (Slater’s) method, confirming the improved field uniformity and validating the effectiveness of the proposed technique.

For Poland, Russia’s war in Ukraine represented a major downward shock to output and upward shock to inflation. However, the strong real wage growth and fiscal stimulus of recent years have driven a nearly full closing of the output gap. In addition, inflation has returned to target due to both appropriately tight monetary policy and a subsiding of external supply shocks. The main vulnerability that emerged from recent years is an increase in the fiscal deficit to a projected 7 percent of GDP in 2025. This has raised public debt to 59 percent of GDP, a 10 percentage point increase in two years.

Global pressure on the public sector to improve the effectiveness, efficiency, and accountability of financial management has led to the emergence of a performance-based budgeting approach. This study aims to analyze the implementation of Performance-Based Budgeting at the North Sulawesi Provincial Health Office. The study uses a descriptive qualitative method with data collection techniques in the form of in-depth interviews, observation, and documentation. The analysis was conducted using a Value for Money approach that assessed economic, efficiency, and effectiveness aspects. The results showed a budget absorption rate of 93.49% with a deficit of IDR 221.5 billion, indicating a high dependence on the Provincial Budget. Performance evaluation revealed waste in several activities, differences in efficiency levels, and output gaps despite 100% achievement of all outcomes. In general, performance-based budgeting has been implemented in accordance with regulations, but improvements in planning, implementation efficiency, and output optimization are still needed to strengthen the Value for Money principle.