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Estimating Output Gaps

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Author Info
Gordon de Brouwer (Reserve Bank of Australia)
Abstract

The output gap, defined as actual less potential output, is an important variable in its own right and as an indicator of incipient changes in inflation. This paper reviews five methods of estimating it for Australian GDP data, including linear time trends, Hodrick-Prescott (HP) filter trends, multivariate HP filter trends, unobservable components models and a production function model. Estimates of the gap vary with the method used and are sensitive to changes in model specification and sample period. While gap estimates at any particular point in time are imprecise, the broad profile of the gap is similar across the range of methods examined. Inflation equations are substantially improved when any measure of the gap is included, and output gaps generally explain innovations in inflation better than output growth.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9809.

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Date of creation: Aug 1998
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Handle: RePEc:rba:rbardp:rdp9809

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Related research
Keywords: output gap; potential output;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O56 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Oceania

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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.
  2. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  3. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept. [Downloadable!] (restricted)
  4. Guay, A & St-Amant, P, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Technical Reports 78, Bank of Canada. [Downloadable!]
    Other versions:
  5. King, Robert G. & Rebelo, Sergio T., 1993. "Low frequency filtering and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 207-231. [Downloadable!] (restricted)
    Other versions:
  6. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July. [Downloadable!] (restricted)
  7. Guy Debelle & Glenn Stevens, 1995. "Monetary Policy Goals for Inflation in Australia," RBA Research Discussion Papers rdp9503, Reserve Bank of Australia. [Downloadable!]
  8. Gordon de Brouwer & James O'Regan, 1997. "Evaluating Simple Monetary-policy Rules for Australia," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia. [Downloadable!]
  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. [Downloadable!]
  10. Guy Debelle & James Vickery, 1997. "Is the Phillips Curve a Curve? Some Evidence and Implications for Australia," RBA Research Discussion Papers rdp9706, Reserve Bank of Australia. [Downloadable!]
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  11. 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. [Downloadable!]
  12. Diebold, Francis X & Senhadji, Abdelhak S, 1996. "The Uncertain Unit Root in Real GNP: Comment," American Economic Review, American Economic Association, vol. 86(5), pages 1291-98, December. [Downloadable!] (restricted)
  13. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 97/177, International Monetary Fund.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Schumacher, Christian, 2000. "Forecasting Trend Output in the Euro Area," Discussion Paper Series 26245, Hamburg Institute of International Economics. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
  3. Taiji Harashima, 2005. "The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers," Macroeconomics 0510026, EconWPA, revised 31 Oct 2005. [Downloadable!]
  4. 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. [Downloadable!]
  5. Luke Willard & Tarhan Feyzioglu, 2006. "Does Inflation in China Affect the United States and Japan?," IMF Working Papers 06/36, International Monetary Fund. [Downloadable!]
  6. Adolfo L.Cobo, . "Output Gap in Colombia: An Eclectic Approach," Borradores de Economia 327, Banco de la Republica de Colombia. [Downloadable!]
  7. 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. [Downloadable!]
  8. Adolfo Cobo, 2005. "Output Gap In Colombia: An Eclectic Approach," BORRADORES DE ECONOMIA 003310, BANCO DE LA REPÚBLICA. [Downloadable!]
  9. W. Bolt & P.J.A. van Els, 2000. "Output Gap and Inflation in the EU," DNB Staff Reports (discontinued) 44, Netherlands Central Bank. [Downloadable!]
    Other versions:
  10. Odile Chagny & Jörg Döpke, 2001. "Measures of the Output Gap in the Euro-Zone: An Empirical Assessment of Selected Methods," Kiel Working Papers 1053, Kiel Institute for the World Economy. [Downloadable!]
  11. Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/04, Reserve Bank of New Zealand. [Downloadable!]
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