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Assessment criteria for output gap estimates

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  • Camba-Méndez, Gonzalo
  • Rodriguez-Palenzuela, Diego
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    Abstract

    This paper assesses the statistical reliability of different measures of the output gap for the Euro-11 area and the US using output, inflation and unemployment systems. In order to assess the reliability of an output gap estimate two criteria are adopted. Firstly, the estimate should have forecasting power over inflation. Secondly, the ex post statistical revisions of the output gap should not differ significantly from previously computed measures. As an additional check on reliability, we find out whether the estimate of the output gap is positively correlated with standard measures of capacity utilization. We find that under our multivariate specification, unobservable components (UC) type models of the output gap show temporal consistency between sequential and final estimates and are consistent with known cyclical indicators. On the other hand, our UC models for the output gap have limited forecasting power for inflation, since they underperform an arbitrary autoregressive model. JEL Classification: C32, E32, E37

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0054.

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    Date of creation: Apr 2001
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    Handle: RePEc:ecb:ecbwps:20010054

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    1. Pesaran, M.H. & Timmermann, A., 1990. "A Simple Non-Parametric Test Of Predictive Performance," Papers 29, California Los Angeles - Applied Econometrics.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
    3. Apel, Mikael & Jansson, Per, 1999. "A theory-consistent system approach for estimating potential output and the NAIRU," Economics Letters, Elsevier, vol. 64(3), pages 271-275, September.
    4. Quah, Danny, 1995. "Measuring Core Inflation," CEPR Discussion Papers 1153, C.E.P.R. Discussion Papers.
    5. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
    6. Danny Quah & Danny Quah & Shaun P. Vahey, 1995. "Measuring Core Inflation," CEP Discussion Papers dp0254, Centre for Economic Performance, LSE.
    7. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
    8. 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.
    9. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January.
    10. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
    11. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
    12. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April.
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    Cited by:
    1. Yap, Josef T., 2003. "The Output Gap and Its Role in Inflation-Targeting in the Philippines," Discussion Papers DP 2003-10, Philippine Institute for Development Studies.
    2. Jean-Paul Pollin & Jean-Luc Gaffard, 2013. "Pourquoi faut-il séparer les activités bancaires ?," Sciences Po publications info:hdl:2441/1cud3763mom, Sciences Po.
    3. Döpke, Jörg, 2004. "Real-time data and business cycle analysis in Germany," Discussion Paper Series 1: Economic Studies 2004,11, Deutsche Bundesbank, Research Centre.
    4. Silvia Sgherri, 2005. "Long-Run Productivity Shifts and Cyclical Fluctuations," IMF Working Papers 05/228, International Monetary Fund.
    5. Odile Chagny & Matthieu Lemoine, 2003. "Ecart de production dans la zone euro : une estimation par le filtre de Hodrick-Prescott multivarié," Sciences Po publications info:hdl:2441/2128, Sciences Po.
    6. Michael W. McCracken & Todd E. Clark, 2003. "The Predictive Content of the Output Gap for Inflation: Resolving In-Sample and Out-of-Sample Evidence," Computing in Economics and Finance 2003 183, Society for Computational Economics.
    7. Sven Langedijk & Martin Larch, 2007. "Testing the EU fiscal surveillance: How sensitive is it to variations in output gap estimates?," European Economy - Economic Papers 285, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    8. Alvaro Aguiar & Manuel M. F. Martins, 2003. "Trend, cycle, and non-linear trade-off in the Euro Area 1970-2001," FEP Working Papers 122, Universidade do Porto, Faculdade de Economia do Porto.
    9. Gonzalo Llosa & Shirley Miller, 2005. "Using additional information in estimating the output gap in Peru: a multivariate unobserved component approach," Working Papers 2005-004, Banco Central de Reserva del Perú.
    10. Gonzalo Llosa/Shirley Miller, 2004. "Using additional information in estimating output gap in Peru: a multivariate unobserved component approach," Econometric Society 2004 Latin American Meetings 243, Econometric Society.
    11. repec:spo:wpecon:info:hdl:2441/2128 is not listed on IDEAS

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