We develop a multivariate dynamic factor model that exploits euro area country-specific information on output and inflation for estimating an area-wide measure of the output gap. In the proposed multi-country framework we moreover allow for flexible stochastic volatility (SV) specifications for...

In simulated out-of-sample experiments to the Eurozone this paper finds that not only are real-time point estimates of the output gap unreliable, but so are measures of uncertainty associated with them. This provides a serious challenge to users of output gap estimates.