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Comparing Alternative Output-Gap Estimators: A Monte Carlo Approach

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Author Info
Andrew Rennison
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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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
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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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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Kichian, Maral, 1999. "Measuring Potential Output within a State-Space Framework," Working Papers 99-9, Bank of Canada. [Downloadable!]
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    Other versions:
  10. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA. [Downloadable!]
    Other versions:
  11. L?tkepohl, Helmut & POSKITT, D.S., 1996. "Testing for Causation Using Infinite Order Vector Autoregressive Processes," Econometric Theory, Cambridge University Press, vol. 12(01), pages 61-87, March. [Downloadable!]
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    Other versions:
  15. 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. [Downloadable!]
  16. repec:cup:etheor:v:12:y:1996:i:1:p:61-87 is not listed on IDEAS
  17. 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. [Downloadable!]
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  20. Cooley, Thomas F. & Dwyer, Mark, 1998. "Business cycle analysis without much theory A look at structural VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Charles St-Arnaud, 2004. "Une approche éclectique d'estimation du PIB potentiel pour le Royaume-Uni," Working Papers 04-46, Bank of Canada. [Downloadable!]
  2. Adolfo Cobo, 2005. "Output Gap In Colombia: An Eclectic Approach," BORRADORES DE ECONOMIA 003310, BANCO DE LA REPÚBLICA. [Downloadable!]
  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. [Downloadable!]
  4. 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. [Downloadable!]
  5. 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. [Downloadable!]
  6. Adolfo L.Cobo, . "Output Gap in Colombia: An Eclectic Approach," Borradores de Economia 327, Banco de la Republica de Colombia. [Downloadable!]
  7. 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. [Downloadable!]
  8. Pierre L. Siklos & Diana N. Weymark, 2006. "Measuring the Impact of Intervention on Exchange Market Pressure," Working Papers 0604, Department of Economics, Vanderbilt University. [Downloadable!]
    Other versions:
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