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The reliability of Canadian output gap estimates

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  • Cayen, Jean-Philippe
  • van Norden, Simon

Abstract

Recent work on policy rules under uncertainty have highlighted the impact of output gap measurement errors on economic outcomes and their importance in the formulation of appropriate policy rules. This paper investigates the reliability of current estimates of the output gap in Canada. We begin by assembling a new data base of quarterly realtime output estimates which spans the post-WWII period and contains data vintages dating back to 1972. We use this with a broad range of univariate and multivariate output gap models to recreate ?contemporary? estimates of the output gap and then study how these estimates are revised over time. The nature and sources of these revisions are used to draw conclusions about the overall measurement errors associated with current estimates of the output gap. Relative to similar recent work with US realtime data, we find that revisions in Canadian output gaps are more important and that the role of data revision is less innocuous than previously indicated. We also show that using the change rather than the level of the output gap may only modestly reduce the measurement problem, and we investigate the relative importance of model uncertainty to overall measurement uncertainty. --

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,29.

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Date of creation: 2004
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Handle: RePEc:zbw:bubdp1:2295

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Keywords: output gap; business cycle; real-time data; policy rules; monetary policy; Canada;

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Cited by:
  1. Aastveit, Knut Are & Trovik, Tørres, 2014. "Estimating the output gap in real time: A factor model approach," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 54(2), pages 180-193.
  2. Todd E. Clark & Sharon Kozicki, 2004. "Estimating equilibrium real interest rates in real time," Research Working Paper, Federal Reserve Bank of Kansas City RWP 04-08, Federal Reserve Bank of Kansas City.
  3. Bernhardsen, Tom & Eitrheim, Oyvind & Jore, Anne Sofie & Roisland, Oistein, 2005. "Real-time data for Norway: Challenges for monetary policy," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 16(3), pages 333-349, December.
  4. Nikolsko-Rzhevskyy, Alex, 2008. "Monetary Policy Evaluation in Real Time: Forward-Looking Taylor Rules Without Forward-Looking Data," MPRA Paper 11352, University Library of Munich, Germany.
  5. Kempkes, Gerhard, 2012. "Cyclical adjustment in fiscal rules: Some evidence on real-time bias for EU-15 countries," Discussion Papers 15/2012, Deutsche Bundesbank, Research Centre.
  6. Fernandez, Adriana Z. & Koenig, Evan F. & Nikolsko-Rzhevskyy, Alex, 2010. "Can alternative Taylor-rule specifications describe Federal Reserve policy decisions?," Journal of Policy Modeling, Elsevier, Elsevier, vol. 32(6), pages 733-757, November.
  7. Ince, Onur & Papell, David H., 2013. "The (un)reliability of real-time output gap estimates with revised data," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 713-721.
  8. Farrell, Greg, 2014. "Countercyclical capital buffers and real-time credit-to-GDP gap estimates: A South African perspective," MPRA Paper 55368, University Library of Munich, Germany.
  9. Hjelm, Göran & Jönsson, Kristian, 2010. "In Search of a Method for Measuring the Output Gap of the Swedish Economy," Working Paper, National Institute of Economic Research 115, National Institute of Economic Research.
  10. Marcellino, Massimiliano & Musso, Alberto, 2010. "Real time estimates of the euro area output gap: reliability and forecasting performance," Working Paper Series, European Central Bank 1157, European Central Bank.
  11. Chiu, Adrian & Wieladek, Tomasz, 2012. "Did output gap measurement improve over time?," Discussion Papers, Monetary Policy Committee Unit, Bank of England 36, Monetary Policy Committee Unit, Bank of England.
  12. Rafael Cusinato & André Minella & Sabino Silva Pôrto Júnior, 2013. "Output gap in Brazil: a real-time data analysis," Empirical Economics, Springer, Springer, vol. 44(3), pages 1113-1127, June.
  13. Dean Croushore, 2008. "Frontiers of real-time data analysis," Working Papers 08-4, Federal Reserve Bank of Philadelphia.
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  16. Jean-Philippe Cayen & Marc-André Gosselin & Sharon Kozicki, 2009. "Estimating DSGE-Model-Consistent Trends for Use in Forecasting," Working Papers, Bank of Canada 09-35, Bank of Canada.
  17. Cayen, Jean-Philippe & van Norden, Simon, 2004. "The reliability of Canadian output gap estimates," Discussion Paper Series 1: Economic Studies 2004,29, Deutsche Bundesbank, Research Centre.

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