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FAQ: How do I measure the Output gap?

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  • Canova, Fabio

Abstract

I investigate the properties of potentials and gaps, of permanent and transitory fluctuations using a variety of DSGE models. Model-based gaps display low frequency variations; have similar frequency representation as potentials, and are correlated with them. These features depend on the properties of the disturbances but not on frictions or modeling principles. Permanent and transitory fluctuations display similar features, but are uncorrelated. I use a number of filters to extract trends and cycles from simulated data. Distortions are large. Gaps are best approximated with a polynomial filter; transitory fluctuations with a differencing approach. I design a filter which reduces the biases of existing filters.

Suggested Citation

  • Canova, Fabio, 2020. "FAQ: How do I measure the Output gap?," CEPR Discussion Papers 14943, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14943
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    Cited by:

    1. Richard K. Crump & Nikolay Gospodinov & Hunter Wieman, 2023. "Sparse Trend Estimation," Staff Reports 1049, Federal Reserve Bank of New York.
    2. Dmitrij Celov & Mariarosaria Comunale, 2022. "Business Cycles in the EU: A Comprehensive Comparison Across Methods," Advances in Econometrics, in: Essays in Honour of Fabio Canova, volume 44, pages 99-146, Emerald Group Publishing Limited.
    3. Ferriani, Fabrizio & Gazzani, Andrea, 2022. "Financial condition indices for emerging market economies: Can Google help?," Economics Letters, Elsevier, vol. 216(C).

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    More about this item

    Keywords

    Gaps and potentials; Permanent and transitory components; Filtering; Cyclical fluctuations; Gain functions;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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