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Real-time output gaps in the estimation of Taylor rules: A red herring?

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  • Christopher Adam
  • David Cobham

Abstract

Real-time, quasi-real, `nearly real` and full sample output gaps for the UK, generated by linear and quadratic, Hodrick-Prescott filter and unobserved components (UC-ARIMA) techniques, are presented and analysed. Particular attention is paid to the behaviour of the different series during the large fluctuations of the late 1980s and early 1990s, and the implied underlying trends of potential output are identified. In that period the rolling-time estimation of the real time and quasi-real gaps involves systematic distortion. After 1994, by contrast, the various measures are closer together, and the choice between them is less important. None of these measures corresponds precisely to what researchers would like - the output gap as understood at the time by policymakers - which it seems nearly impossible to identify with (non-spurious) precision but, given the nature and purpose of Taylor rule estimations, imperfect measures are acceptable. For periods with large swings researchers should settle for the nearly real series, while for more stable periods the choice of measure makes little difference.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 218.

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Date of creation: 01 Dec 2004
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Handle: RePEc:oxf:wpaper:218

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Keywords: Output Gap; Real-Time; Quasi-Real; Nearly Real; Taylor Rules;

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  1. Christopher Adam & David Cobham & Eric Girardin, 2005. "Monetary Frameworks and Institutional Constraints: UK Monetary Policy Reaction Functions, 1985-2003," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 497-516, 08.
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Cited by:
  1. Garratt, Anthony & Lee, Kevin & Mise, Emi & Shields, Kalvinder, 2009. "Real time representation of the UK output gap in the presence of model uncertainty," International Journal of Forecasting, Elsevier, Elsevier, vol. 25(1), pages 81-102.
  2. Anthony Garratt & Kevin Lee & Emi Mise & Kalvinder Shields, 2006. "Real Time Representation of the UK Output Gap in the Presence of Trend Uncertainty," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 0618, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. Berlemann, Michael & Hilscher, Kai, 2010. "Effective monetary policy conservatism: A comparison of 11 OECD countries," HWWI Research Papers 2-21, Hamburg Institute of International Economics (HWWI).
  4. Nikolay Markov & Thomas Nitschka, 2013. "Estimating Taylor Rules for Switzerland: Evidence from 2000 to 2012," Working Papers 2013-08, Swiss National Bank.

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