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Comparing Alternative Output-Gap Estimators: A Monte Carlo Approach

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  • Andrew Rennison
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    Abstract

    The author evaluates the ability of a variety of output-gap estimators to accurately measure the output gap in a model economy. A small estimated model of the Canadian economy is used to generate artificial data. Using output and inflation data generated by this model, the author uses each output-gap estimation methodology to construct an estimate of the true output gap. He then evaluates the methodologies by comparing their respective estimates of the output gap with the true gap. The estimators are evaluated on the basis of correlations between the actual and estimated output gap, as well as the root-mean-squared estimation error. The author also varies the properties of potential output and the output gap in the data-generating process to test the robustness of his results. His findings indicate that an estimator that combines the Hodrick-Prescott filter with a Blanchard-Quah structural vector autoregression (SVAR) yields an estimate that is accurate compared with competing methods at the end-of-sample. He also finds that the performance of the SVAR relative to that of other methodologies is quite robust to violations in the identifying assumptions of the SVAR.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 03-8.

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    Length: 33 pages
    Date of creation: 2003
    Date of revision:
    Handle: RePEc:bca:bocawp:03-8

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    Related research

    Keywords: Business fluctuations and cycles; Econometric and statistical methods; Potential output;

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    References

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    1. Wecker, William E, 1979. "Predicting the Turning Points of a Time Series," The Journal of Business, University of Chicago Press, vol. 52(1), pages 35-50, January.
    2. Kichian, Maral, 1999. "Measuring Potential Output within a State-Space Framework," Working Papers 99-9, Bank of Canada.
    3. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
    4. Guay, A & St-Amant, P, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Technical Reports 78, Bank of Canada.
    5. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
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    8. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
    9. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
    10. Jean-Philippe Cayen & Simon van Norden, 2002. "La fiabilité des estimations de l'écart de production au Canada," Working Papers 02-10, Bank of Canada.
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    13. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
    14. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
    15. repec:cup:etheor:v:12:y:1996:i:1:p:61-87 is not listed on IDEAS
    16. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
    17. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
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    Citations

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    Cited by:
    1. Adolfo L.Cobo, . "Output Gap in Colombia: An Eclectic Approach," Borradores de Economia 327, Banco de la Republica de Colombia.
    2. Charles St-Arnaud, 2004. "Une approche éclectique d'estimation du PIB potentiel pour le Royaume-Uni," Working Papers 04-46, Bank of Canada.
    3. Anna Piretti & Charles St-Arnaud, 2006. "Launching the NEUQ: The New European Union Quarterly Model, A Small Model of the Euro Area and U.K. Economies," Working Papers 06-22, Bank of Canada.
    4. David Dupuis, 2004. "The New Keynesian Hybrid Phillips Curve: An Assessment of Competing Specifications for the United States," Working Papers 04-31, Bank of Canada.
    5. Adolfo Cobo, 2005. "Output Gap In Colombia: An Eclectic Approach," BORRADORES DE ECONOMIA 003310, BANCO DE LA REPÚBLICA.
    6. Eloi Laurent & Michel Juillard & Patrick Musso & Michel Aglietta & Jean Chateau & Hélène Baudchon & Gilles Le Garrec & Jean-Paul Fitoussi & Jérôme Creel & Vincent Touze & Jean-Luc Gaffard & Jacque, 2005. "Potential Growth in the EU : Prospects from Technical Progress and Eastern Enlargment," Sciences Po publications info:hdl:2441/2500, Sciences Po.
    7. David E. Giles & Chad N. Stroomer, 2004. "Identifying the Cycle of a Macroeconomic Time-Series Using Fuzzy Filtering," Econometrics Working Papers 0406, Department of Economics, University of Victoria.
    8. P. Siklos, D. Waymark, 2006. "Measuring the Impact of Intervention on Exchange Market Pressure," Working Papers eg0048, Wilfrid Laurier University, Department of Economics, revised 2006.
    9. René Lalonde & Nicolas Parent, 2006. "The Federal Reserve's Dual Mandate: A Time-Varying Monetary Policy Priority Index for the United States," Working Papers 06-11, Bank of Canada.
    10. repec:spo:wpecon:info:hdl:2441/2500 is not listed on IDEAS

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