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Improved output gap estimates and forecasts using a local linear regression

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  • Marlon Fritz

Abstract

The output gap, the difference between potential and actual output, has a direct impact on policy decisions, e.g., monetary policy. Due to methodological problems, estimating this gap and its further analysis remains the subject of many debates. We propose a local polynomial regression and its forecasting extension for a systematic output gap estimation. Further, the local polynomial regression is proposed for the (multivariate) OECD production function approach, and its reliability is demonstrated in forecasting output growth. Comparing the proposed gap to the Hodrick-Prescott filter and to estimations by experts from the FED and OECD shows a higher correlation of our output gap with those from economic institutions. Furthermore, it sometimes happens that gaps with different magnitudes and different positions above or below the trend are observed between different methods. This may cause competing policy implications which can be improved with our results.

Suggested Citation

  • Marlon Fritz, 2022. "Improved output gap estimates and forecasts using a local linear regression," International Economics, CEPII research center, issue 172, pages 157-167.
    • Handle: RePEc:cii:cepiie:2022-q3-172-10
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    Keywords

    Business cycles; Nonparametric methods; Output gap; Trend identification;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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