A new methodology for a quarterly measure of the Output Gap

This paper presents a new mixed frequency methodology to estimate output gaps and poten- tial output on a quarterly basis. The methodology strongly relies on the production function method commonly agreed at the European level (D'Auria et. al., 2010) but signicantly improves it as allows to assess the impact of real time forecast for GDP and other underlying variables. This feature of the model is particularly welcome in the current Italian budgetary framework which has foreseen the introduction of the principle of a budget balance in cycli- cally adjusted and structural terms in the Constitution. By allowing to measure output gap with a quarterly span on the basis of recent developments indicators, the methodology pro- vides interesting hints on the cyclical position of the economy in real time to be used for deriving cyclically-adjusted scal aggregates.