Microdata-based output gap estimation using business tendency surveys

Abstract

This study employs a micro-econometric model to estimate output gaps by analysing microdata from business tendency surveys and annual enterprise activity reports. We apply the control function method to estimate sector-specific production functions that incorporate information about firms' capacity utilisation levels. To construct aggregate indices of potential output, we calculate potential input values by extracting statistical trends from firm-level data and then input them into production functions. We then compute microdata-based output gaps for regions, sectors, and the total economy. Subsequently, we decompose the total output gap into three primary components: capital-, labour-, and capacity utilisation-based output gaps, as well as weighted sectoral and regional output gaps. We validate our methodology by analysing the Polish manufacturing, construction, and service sectors, highlighting its strengths and limitations. Our findings reveal that capacity utilisation effectively captures the business cycle component within unadjusted total factor productivity indices. Finally, we demonstrate that microdata-based output gap measures are significant explanatory variables in the Phillips curve.