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Real-Time Estimation of the Output Gap in Japan and its Usefulness for Inflation Forecasting and Policymaking

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  • Kamada, Koichiro

Abstract

This paper examines the methods used by the Bank of Japan for the estimation of the output gap. Attention is paid to the real-time estimation problem. After reviewing the evolution of output gap estimation at the Bank, I discuss advantages and disadvantages of the various output gap measures. First, I examine the usefulness of the output gap for inflation forecasting and show that the real-time output gap sometimes includes much noise. Second, I investigate the implications of the real-time estimation problem for the policy evaluation. Third, I exploit TANKAN to enhance the usefulness of the real-time output gap. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,14.

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Date of creation: 2004
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Handle: RePEc:zbw:bubdp1:2159

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Keywords: output gap; real-time estimation; inflation forecasting; Taylor Rule;

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References

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  1. Kuttner, Kenneth N. & Posen, Adam S., 2004. "The difficulty of discerning what's too tight: Taylor rules and Japanese monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 53-74, March.
  2. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
  3. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 583-601, June.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  5. 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.
  6. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  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. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 77-128.
  9. Kamada, Koichiro & Masuda, Kazuto, 2001. "Effects of Measurement Error on the Output Gap in Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(2), pages 109-154, May.
  10. Adam S. Posen, 1998. "Restoring Japan's Economic Growth," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 35.
  11. Evan F. Koenig & Sheila Dolmas & Jeremy Piger, 2000. "The use and abuse of "real-time" data in economic forecasting," International Finance Discussion Papers 684, Board of Governors of the Federal Reserve System (U.S.).
  12. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  13. Okina, Kunio & Shirakawa, Masaaki & Shiratsuka, Shigenori, 2001. "The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 395-450, February.
  14. 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.
  15. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  16. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
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Citations

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Cited by:
  1. Todd E. Clark & Sharon Kozicki, 2004. "Estimating equilibrium real interest rates in real time," Research Working Paper RWP 04-08, Federal Reserve Bank of Kansas City.
  2. Koichiro Kamada, 2009. "The Stability of Currency Systems in East Asia --Quantitative Analysis Using a Multi-Country Macro-Econometric Model--," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 5(1), pages 109-138, October.
  3. Ivan Kitov & Oleg Kitov, 2013. "Inflation, unemployment, and labor force. Phillips curves and long-term projections for Japan," Papers 1309.1757, arXiv.org.
  4. Dean Croushore, 2008. "Frontiers of real-time data analysis," Working Papers 08-4, Federal Reserve Bank of Philadelphia.
  5. Emmanuel De Veirman, 2007. "Which nonlinearity in the Phillips curve? The absence of accelerating deflation in Japan," Reserve Bank of New Zealand Discussion Paper Series DP2007/14, Reserve Bank of New Zealand.
  6. Hara, Naoko & Ichiue, Hibiki, 2011. "Real-time analysis on Japan's labor productivity," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 107-130, June.
  7. George Kapetanios & Tony Yates, 2010. "Estimating time variation in measurement error from data revisions: an application to backcasting and forecasting in dynamic models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(5), pages 869-893.
  8. Ince, Onur & Papell, David H., 2013. "The (un)reliability of real-time output gap estimates with revised data," Economic Modelling, Elsevier, vol. 33(C), pages 713-721.
  9. Ivan O. Kitov, 2010. "Inflation and unemployment in Japan: from 1980 to 2050," Papers 1002.0277, arXiv.org.
  10. Gerberding, Christina & Seitz, Franz & Worms, Andreas, 2007. "Money-based interest rate rules: lessons from German data," Discussion Paper Series 1: Economic Studies 2007,06, Deutsche Bundesbank, Research Centre.
  11. Mésonnier, J-S., 2006. "The Reliability of Macroeconomic Forecasts based on Real Interest Rate Gap Estimates in Real Time: an Assessment for the Euro Area," Working papers 157, Banque de France.
  12. Umino, Shingo, 2014. "Real-time estimation of the equilibrium real interest rate: Evidence from Japan," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 17-32.
  13. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.
  14. Jean-Stéphane MESONNIER, 2007. "The predictive content of the real interest rate gap for macroeconomic variables in the euro area," Money Macro and Finance (MMF) Research Group Conference 2006 102, Money Macro and Finance Research Group.

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