In this paper, we develop an analytical framework for the estimation of potential output and output gaps for the euro area combining multivariate filtering techniques with the production function approach. The advantage of this methodology lies in the fact that it combines a model based approach to explicit statistical assumptions concerning the estimation of the potential values of the components of the production function. We discuss the production function approach and the main issues raised by this approach. We then present the main empirical studies which have estimated production function based output gaps with multivariate filtering techniques. The production function approach will be implemented with Multivariate Hodrick-Prescott filters (HPMV). The advantage of the multivariate production function approach will also be assessed through using a variety of statistical criteria.
