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A New Technique for Simultaneous Estimation of Potential Output and the Phillips Curve

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  • Hirose, Yasuo

    (Bank of Japan)

  • Kamada, Koichiro

    (Bank of Japan)

Abstract

A new technique is demonstrated for the simultaneous estimation of potential output and the Phillips curve. In this paper, we define potential output as the non-accelerating inflation level of output (NAILO). The NAILO is not a simple trend of actual output. Instead, it is the critical level of output such that, were actual output at this level, the inflation rate would be neither accelerating nor decelerating. Our application is the case of Japan, for which we estimate both the NAILO and the Phillips curve and investigate their properties. It is shown that during the 1980s and 1990s, the Japanese output gap, as measured using the NAILO, was negative on average, reflecting the global trend of disinflation. We also point out that this NAILO-based output gap has displayed a tendency to move in line with corporate sentiment and is thus a useful indicator of business conditions. However, being subject to re-estimation due to the revision of source data and the arrival of new data, the NAILO estimate is surrounded by uncertainty. This uncertainty needs to be kept in mind in real-time analysis, and the NAILO estimate should be interpreted with care, particularly in the process of policymaking.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 21 (2003)
Issue (Month): 2 (August)
Pages: 93-112

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Handle: RePEc:ime:imemes:v:21:y:2003:i:2:p:93-112

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  1. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  2. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
  3. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Harvard Institute of Economic Research Working Papers 1963, Harvard - Institute of Economic Research.
  4. Higo, Masahiro & Nakada, Sachiko-Kuroda, 1998. "How Can We Extract a Fundamental Trend from an Economic Time- Series?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(2), pages 61-111, December.
  5. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  6. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  7. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  8. Kamada, Koichiro & Masuda, Kazuto, 2001. "Effects of Measurement Error on the Output Gap in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(2), pages 109-154, May.
  9. James G. MacKinnon, 2002. "Bootstrap inference in econometrics," Canadian Journal of Economics, Canadian Economics Association, vol. 35(4), pages 615-645, November.
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Cited by:
  1. Emmanuel De Veirman, 2007. "Which Nonlinearity in the Phillips Curve? The Absence of Accelerating Deflation in Japan," Economics Working Paper Archive 536, The Johns Hopkins University,Department of Economics.
  2. Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/04, Reserve Bank of New Zealand.
  3. Franziska Bignasca & Enzo Rossi, 2007. "Applying the Hirose-Kamada filter to Swiss data: Output gap and exchange rate pass-through estimates," Working Papers 2007-10, Swiss National Bank.
  4. Masayuki Nakakuki & Akira Otani & Shigenori Shiratsuka, 2004. "Distortions in Factor Markets and Structural Adjustments in the Economy," Hi-Stat Discussion Paper Series d04-26, Institute of Economic Research, Hitotsubashi University.
  5. David Gruen & Tim Robinson & Andrew Stone, 2005. "Output Gaps In Real Time: How Reliable Are They?," The Economic Record, The Economic Society of Australia, vol. 81(252), pages 6-18, 03.
  6. Ippei Fujiwara, 2003. "Is There a Direct Effect of Money?: Money's Role in an Estimated Monetary Business Cycle Model of the Japanese Economy," Discussion Papers in Economics and Business 03-15, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  7. Kamada, Koichiro, 2004. "Real-Time Estimation of the Output Gap in Japan and its Usefulness for Inflation Forecasting and Policymaking," Discussion Paper Series 1: Economic Studies 2004,14, Deutsche Bundesbank, Research Centre.

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