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Measuring Output Gap Uncertainty

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  • Anthony Garratt
  • James Mitchell
  • Shaun P. Vahey

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We propose a methodology for producing density forecasts for the output gap in real time using a large number of vector autoregessions in inflation and output gap measures. Density combination utilizes a linear mixture of experts framework to produce potentially non-Gaussian ensemble densities for the unobserved output gap. In our application, we show that data revisions alter substantially our probabilistic assessments of the output gap using a variety of output gap measures derived from univariate detrending filters. The resulting ensemble produces well-calibrated forecast densities for US inflation in real time, in contrast to those from simple univariate autoregressions which ignore the contribution of the output gap. Combining evidence from both linear trends and more flexible univariate detrending filters induces strong multi-modality in the predictive densities for the unobserved output gap. The peaks associated with these two detrending methodologies indicate output gaps of opposite sign for some observations, reflecting the pervasive nature of model uncertainty in our US data.

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File URL: http://www.ems.bbk.ac.uk/research/wp/PDF/BWPEF0909.pdf
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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0909.

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Date of creation: Oct 2009
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Handle: RePEc:bbk:bbkefp:0909

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References

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Citations

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Cited by:
  1. Marcellino, Massimiliano & Musso, Alberto, 2010. "The Forecasting Performance of Real Time Estimates of the Euro Area Output Gap," CEPR Discussion Papers 7763, C.E.P.R. Discussion Papers.
  2. Pierre Guérin & Laurent Maurin & Matthias Mohr, 2011. "Trend-cycle decomposition of output and euro area inflation forecasts: a real-time approach based on model combination," Working Paper Series 1384, European Central Bank.
  3. Anthony Garratt & James Mitchell & Shaun P. Vahey & Elizabeth C. Wakerly, 2010. "Real-time Inflation Forecast Densities from Ensemble Phillips Curves," CAMA Working Papers 2010-34, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Francesco Ravazzolo & Shaun P Vahey, 2010. "Measuring Core Inflation in Australia with Disaggregate Ensembles," RBA Annual Conference Volume, in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.
  5. Juan Manuel Julio, 2011. "Data Revisions and the Output Gap," BORRADORES DE ECONOMIA 007956, BANCO DE LA REPÚBLICA.
  6. Knut Are Aastveit & Karsten R. Gerdrup & Anne Sofie Jore & Leif Anders Thorsrud, 2011. "Nowcasting GDP in Real-Time: A Density Combination Approach," Working Papers 0003, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.

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