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A New Technique for Simultaneous Estimation of Potential Output and the Phillips Curve

Author

Listed:
  • Hirose, Yasuo

    (Bank of Japan)

  • Kamada, Koichiro

    (Bank of Japan)

Abstract

A new technique is demonstrated for the simultaneous estimation of potential output and the Phillips curve. In this paper, we define potential output as the non-accelerating inflation level of output (NAILO). The NAILO is not a simple trend of actual output. Instead, it is the critical level of output such that, were actual output at this level, the inflation rate would be neither accelerating nor decelerating. Our application is the case of Japan, for which we estimate both the NAILO and the Phillips curve and investigate their properties. It is shown that during the 1980s and 1990s, the Japanese output gap, as measured using the NAILO, was negative on average, reflecting the global trend of disinflation. We also point out that this NAILO-based output gap has displayed a tendency to move in line with corporate sentiment and is thus a useful indicator of business conditions. However, being subject to re-estimation due to the revision of source data and the arrival of new data, the NAILO estimate is surrounded by uncertainty. This uncertainty needs to be kept in mind in real-time analysis, and the NAILO estimate should be interpreted with care, particularly in the process of policymaking.

Suggested Citation

  • 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.
  • Handle: RePEc:ime:imemes:v:21:y:2003:i:2:p:93-112
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me21-2-4.pdf
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    References listed on IDEAS

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    1. Koichiro Kamada & Kazuto Masuda, 2000. "Effects of Measurement Error on the Output Gap in Japan," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    2. 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, pages 297-346.
    3. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, pages 11-32.
    4. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, pages 964-985.
    5. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Journal of Economic Perspectives, American Economic Association, pages 115-136.
    6. Yasuo Hirose & Koichiro Kamada, 2002. "Time-Varying NAIRU and Potential Growth in Japan," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    7. James G. MacKinnon, 2002. "Bootstrap inference in econometrics," Canadian Journal of Economics, Canadian Economics Association, vol. 35(4), pages 615-645, November.
    8. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 231-247.
    9. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, pages 33-49.
    10. 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.
    11. Higo, Masahiro & Nakada, Sachiko-Kuroda, 1998. "How Can We Extract a Fundamental Trend from an Economic Time- Series?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(2), pages 61-111, December.
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    Citations

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    Cited by:

    1. Emmanuel De Veirman, 2009. "What Makes the Output-Inflation Trade-Off Change? The Absence of Accelerating Deflation in Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1117-1140, September.
    2. Loriano Mancini & Angelo Ranaldo & Jan Wrampelmeyer, 2013. "Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums," Journal of Finance, American Finance Association, vol. 68(5), pages 1805-1841, October.
    3. Ippei Fujiwara, 2003. "Is There a Direct Effect of Money?: Money's Role in an Estimated Monetary Business Cycle Model of the Japanese Economy," Discussion Papers in Economics and Business 03-15, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    4. Nakakuki, Masayuki & Otani, Akira & Shiratsuka, Shigenori, 2004. "Distortions in Factor Markets and Structural Adjustments in the Economy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, pages 71-99.
    5. Masayuki Nakakuki & Akira Otani & Shigenori Shiratsuka, 2004. "Distortions in Factor Markets and Structural Adjustments in the Economy," Hi-Stat Discussion Paper Series d04-26, Institute of Economic Research, Hitotsubashi University.
    6. Kamada, Koichiro, 2005. "Real-time estimation of the output gap in Japan and its usefulness for inflation forecasting and policymaking," The North American Journal of Economics and Finance, Elsevier, pages 309-332.
    7. David Gruen & Tim Robinson & Andrew Stone, 2005. "Output Gaps In Real Time: How Reliable Are They?," The Economic Record, The Economic Society of Australia, vol. 81(252), pages 6-18, March.
    8. 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.
    9. Fujiwara, Ippei, 2007. "Is there a direct effect of money?: Money's role in an estimated monetary business cycle model of the Japanese economy," Japan and the World Economy, Elsevier, pages 329-337.
    10. Hosszú, Zsuzsanna & Körmendi, Gyöngyi & Mérő, Bence, 2016. "Egy- és többváltozós szűrők a hitelrés alakulásának meghatározására
      [Filters with single or multiple variables in measuring the size of the credit gap]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(3), pages 233-259.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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