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Estimates of the output gap in real time: how well have we been doing?

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Abstract

This paper addresses the real-time versus ex-post properties of the output gap as quantified by the Reserve Bank of New Zealand's multivariate (MV) filter, starting with the second quarter of 1997, when the current procedure was implemented. There are three sources of revisions of the output gap: revisions of real GDP data, the end point problem of symmetric filters and changes to the calibration of the MV filter. The performance of the output gap with respect to signalling inflationary pressure, as measured by future non- tradables inflation, has been reasonably good, both in real time and ex post. However, during the recorded history of the MV filter, the revisions to real-time output gap have been no smaller than had a standard Hodrick-Prescott (HP) filter been used. Moreover, the MV filter leads to permanently different levels of the output gap estimates if compared to a purely statistical trend. The MV filter is a hybrid construct. The empirical reference to indicators of inflationary pressure distances it from the original concept of the output gap, where a deviation of observed from potential output is taken as a cause of inflationary pressure. There is some indication that a major recalibration of the MV filter in 2002 helped to maintain the correlation with a target variable that it is supposed to "explain".

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2004/dp04_04.pdf
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Bibliographic Info

Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP 2004/04.

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Length: 31 p
Date of creation: May 2004
Date of revision:
Handle: RePEc:nzb:nzbdps:2004/04

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  1. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CEPR Discussion Papers 4830, C.E.P.R. Discussion Papers.
  2. Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
  3. W A Razzak, 2002. "Monetary policy and forecasting inflation with and without the output gap," Reserve Bank of New Zealand Discussion Paper Series DP2002/03, Reserve Bank of New Zealand.
  4. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
  5. James A. Kahn & Robert W. Rich, 2003. "Tracking the new economy: using growth theory to detect changes in trend productivity," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  6. A. J. Hagger & Nicolaas Groenewold, 2003. "Time to Ditch the Natural Rate?," The Economic Record, The Economic Society of Australia, vol. 79(246), pages 324-335, 09.
  7. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series 2003-36, Board of Governors of the Federal Reserve System (U.S.).
  8. Razzak, W., 1997. "The Hodrick-Prescott technique: A smoother versus a filter: An application to New Zealand GDP," Economics Letters, Elsevier, vol. 57(2), pages 163-168, December.
  9. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
  10. Jean-Philippe Cayen & Simon van Norden, 2002. "La fiabilité des estimations de l'écart de production au Canada," Working Papers 02-10, Bank of Canada.
  11. Simon van Norden, 2002. "Filtering for Current Analysis," Working Papers 02-28, Bank of Canada.
  12. Hirose, Yasuo & Kamada, Koichiro, 2003. "A New Technique for Simultaneous Estimation of Potential Output and the Phillips Curve," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 93-112, August.
  13. Kevin J. Lansing, 2002. "Can the Phillips curve help forecast inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct4.
  14. James Twaddle & Florin Citu, 2003. "The output gap and its role in monetary policy decision-making," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, March.
  15. Jaromir Benes & Papa M'B. P. N'Diaye, 2004. "A Multivariate Filter for Measuring Potential Output and the NAIRU Application to the Czech Republic," IMF Working Papers 04/45, International Monetary Fund.
  16. Rünstler, Gerhard, 2002. "The information content of real-time output gap estimates, an application to the euro area," Working Paper Series 0182, European Central Bank.
  17. Richard Etter & Michael Graff, 2004. "Coincident and Leading Indicators of Manufacturing Industry," Journal of Business Cycle Measurement and Analysis, OECD Publishing,CIRET, vol. 2004(1), pages 109-131.
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Citations

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Cited by:
  1. Mohamed A. Osman & Rosmy Jean Louis & Faruk Balli, 2009. "Output gap and inflation nexus: the case of United Arab Emirates," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 1(1), pages 118-135.
  2. David Hargreaves & Hannah Kite & Bernard Hodgetts, 2006. "Modelling New Zealand inflation in a Phillips curve," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, September.
  3. Jan-Egbert Sturm & Michael Graff, 2009. "Schätzung der Outputlücke," KOF Analysen, KOF Swiss Economic Institute, ETH Zurich, vol. 3(2), pages 55-67, June.
  4. repec:cml:incocp:1-03 is not listed on IDEAS
  5. Michael Graff, 2005. "Ein multisektoraler Sammelindikator für die Schweizer Konjunktur," KOF Working papers 05-107, KOF Swiss Economic Institute, ETH Zurich.
  6. Timothy Irwin & Oscar Parkyn, 2009. "Improving the Management of the Crown’s Exposure to Risk," Treasury Working Paper Series 09/06, New Zealand Treasury.
  7. Rodrigo Fuentes S. & Fabián Gredig U. & Mauricio Larraín E., 2008. "The output Gap in chile: Measurement and Evaluation," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(2), pages 7-30, August.
  8. Alfred V. Guender & Yu Xie, 2006. "Is There an Exchange Rate Channel in the Forward-Looking Phillips Curve? A Theoretical and Empirical Investigation," Working Papers in Economics 06/16, University of Canterbury, Department of Economics and Finance.
  9. Michael Graff, 2006. "Internationale Konjunkturverbunde," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 226(4), pages 385-417, July.
  10. L Christopher Plantier & Ozer Karagedikli, 2005. "Do so-called multivariate filters have better revision properties? An empirical analysis," Computing in Economics and Finance 2005 250, Society for Computational Economics.
  11. Rodrigo Fuentes & Fabián Gredig & Mauricio Larraín, 2007. "Estimating the Output Gap for Chile," Working Papers Central Bank of Chile 455, Central Bank of Chile.

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