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Estimating the output gap in times of COVID-19

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  • Durand, Luigi
  • Fornero, Jorge Alberto

Abstract

We extend a standard multivariate filter used to estimate the Output Gap (OG) in Chile to account for large economic shocks, such as those observed during the COVID-19 crisis. We propose two methodological extensions. First, we introduce exogenous supply shocks in the dynamics of potential output growth. Second, we add “system” prior distributions on a set of characteristics of the model. We show that these extensions improve several desirable properties of Chile’s OG, such as stability, accuracy, consistency and also reduce the uncertainty surrounding the estimates. Next, we generalize our results by applying our methodology to a panel of countries, showing that the extended filter yields a tighter relationship between inflation developments and the OG, when compared to its standard counterpart.

Suggested Citation

  • Durand, Luigi & Fornero, Jorge Alberto, 2024. "Estimating the output gap in times of COVID-19," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(4).
    • Handle: RePEc:eee:lajcba:v:5:y:2024:i:4:s2666143824000115
    DOI: 10.1016/j.latcb.2024.100129
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    More about this item

    Keywords

    Business cycles; Multivariate filter; Potential output; Output gaps; COVID-19;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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