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Estimating the output gap in real time: A factor model approach

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Author Info
Knut Are Aastveit () (Norges Bank (Central Bank of Norway)and The University of Oslo)
Tørres G. Trovik () (Norges Bank (Central Bank of Norway)and The World Bank)
Abstract

An approximate dynamic factor model can substantially improve the reliability of real time output gap estimates. The model extracts a common component from macroeconomic indicators, which reduces errors in the gap due to data revisions. The model's ability to handle the unbalanced arrival of data, also yields favorable nowcasting properties and thus starting conditions for the filtering of data into trend and deviations from trend. Combined with the method of augmenting data with forecasts prior to filtering, this greatly reduces the end-of-sample imprecision in the gap estimate. The increased precision has economic significance for real time policy decisions.

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Publisher Info
Paper provided by Norges Bank in its series Working Paper with number 2008/23.

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Length: 42 pages
Date of creation: 12 Dec 2008
Date of revision:
Handle: RePEc:bno:worpap:2008_23

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Related research
Keywords: Output gap; Real time analysis; Monetary policy; Forecasting; Factor model;

Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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