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Measuring the Natural Output Gap Using Actual and Expected Output Data

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  • Kevin Lee
  • Anthony Garratt
  • Kalvinder Shields

Abstract

An output gap measure is suggested based on a multivariate Beveridge-Nelson decomposition of output using a vector-autoregressive model that includes data on actual output and on expected output obtained from surveys. The gap is estimated using an integrated approach to identifying permanent and different types of transitory shocks to output. The gap has a statistical basis but is provided economic meaning by relating it to natural output in DSGE models. The approach is applied to quarterly US data over 1970q1-2007q4. Estimated gaps have sensible statistical properties and perform well in explaining inflation in estimates of New Keynesian Phillips curves.

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File URL: http://www.nottingham.ac.uk/cfcm/documents/papers/10-07.pdf
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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 10/07.

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Handle: RePEc:not:notcfc:10/07

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Keywords: Trend Output; Natural Output Level; Output Gap; Beveridge-Nelson Decomposition; Survey-based Expectations; New Keynesian Phillips Curve.;

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  1. Andres, Javier & Lopez-Salido, J. David & Nelson, Edward, 2005. "Sticky-price models and the natural rate hypothesis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(5), pages 1025-1053, July.
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