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Visualizing the Invisible: Estimating the New Keynesian Output Gap via a Bayesian Approach

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  • Tim Willems

    (University of Amsterdam)

Abstract

As both the natural level of output and the New Keynesian output gap cannot be observed in practice, there is quite some debate on the question how these variables look like in practice. Rather than taking the standard approach of using a time trend or the HP-filter to obtain estimates of these two objects, this paper takes a theoretically more sound route by separating trend from cycle via Bayesian estimation of a New Keynesian model, augmented with an unobserved components model for output. This delivers us with model consistent estimates of both the natural level of output and the New Keynesian output gap. These estimates are then compared with the dominant output gap proxies used in the literature. It turns out that the benefits of using the model-based approach taken in this paper mainly emerge in real time, thereby making this method potentially useful for the conduct of monetary policy.

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File URL: http://papers.tinbergen.nl/09074.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-074/2.

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Date of creation: 21 Aug 2009
Date of revision: 26 Mar 2010
Handle: RePEc:dgr:uvatin:20090074

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Web page: http://www.tinbergen.nl

Related research

Keywords: Key words: Bayesian estimation; unobserved components model; New Keynesian model; output gap; New Keynesian Phillips curve;

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  1. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, 05.
  2. Fernandez-Villaverde, Jesus & Francisco Rubio-Ramirez, Juan, 2004. "Comparing dynamic equilibrium models to data: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 123(1), pages 153-187, November.
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Cited by:
  1. Daniel Kienzler & Kai Daniel Schmid, 2013. "Monetary Policy and Hysteresis in Potential Output," IMK Working Paper 116-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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