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Can inflation data improve the real-time reliability of output gap estimates?

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  • Christophe Planas

    (Joint Research Centre of European Commission, Ispra, Italy)

  • Alessandro Rossi

    (Joint Research Centre of European Commission, Ispra, Italy)

Abstract

Potential output plays a central role in monetary policy and short-term macroeconomic policy making. Yet, characterizing the output gap involves a trend-cycle decomposition, and unobserved component estimates are typically subject to a large uncertainty at the sample end. An important consequence is that output gap estimates can be quite inaccurate in real time, as recently highlighted by Orphanides and van Norden (2002), and this causes a serious problem for policy makers. For the cases of the US, EU-11 and two EU countries, we evaluate the benefits of using inflation data for improving the accuracy of real-time estimates. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Christophe Planas & Alessandro Rossi, 2004. "Can inflation data improve the real-time reliability of output gap estimates?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 121-133.
  • Handle: RePEc:jae:japmet:v:19:y:2004:i:1:p:121-133
    DOI: 10.1002/jae.726
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    References listed on IDEAS

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    1. 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.
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    5. Apel, Mikael & Jansson, Per, 1999. "A theory-consistent system approach for estimating potential output and the NAIRU," Economics Letters, Elsevier, vol. 64(3), pages 271-275, September.
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    8. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-368, July.
    9. Orphanides, Athanasios & Porter, Richard D. & Reifschneider, David & Tetlow, Robert & Finan, Frederico, 2000. "Errors in the measurement of the output gap and the design of monetary policy," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 117-141.
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    12. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388.
    13. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January.
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    Citations

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    Cited by:

    1. Fabrizio Zampolli & Andrew Blake, 2005. "Time Consistent Policy in Markov Switching Models," Money Macro and Finance (MMF) Research Group Conference 2005 2, Money Macro and Finance Research Group.
    2. Marcellino, Massimiliano & Musso, Alberto, 2011. "The reliability of real-time estimates of the euro area output gap," Economic Modelling, Elsevier, vol. 28(4), pages 1842-1856, July.
    3. Clark, Todd E. & Kozicki, Sharon, 2005. "Estimating equilibrium real interest rates in real time," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 395-413, December.
    4. Harvey, Andrew C. & Trimbur, Thomas M. & Van Dijk, Herman K., 2007. "Trends and cycles in economic time series: A Bayesian approach," Journal of Econometrics, Elsevier, vol. 140(2), pages 618-649, October.
    5. Proietti, Tommaso, 2008. "Structural Time Series Models for Business Cycle Analysis," MPRA Paper 6854, University Library of Munich, Germany.
    6. Jens Boysen‐Hogrefe, 2015. "Monetary Aggregates to Improve Early Output Gap Estimates in the Euro Area: An Empirical Assessment," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 34(7), pages 533-542, November.
    7. Galimberti, Jaqueson K. & Moura, Marcelo L., 2016. "Improving the reliability of real-time output gap estimates using survey forecasts," International Journal of Forecasting, Elsevier, vol. 32(2), pages 358-373.
    8. Andrew Harvey, 2011. "Modelling the Phillips curve with unobserved components," Applied Financial Economics, Taylor & Francis Journals, vol. 21(1-2), pages 7-17.
    9. Winkelried, Diego, 2013. "Modelo de Proyección Trimestral del BCRP: Actualización y novedades," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 26, pages 9-60.
    10. Kuusi, Tero, 2018. "Does the structural budget balance guide fiscal policy pro-cyclically? Evidence from the Finnish Great Depression of the 1990s," MPRA Paper 84829, University Library of Munich, Germany.
    11. Christopher Adam & David Cobham, 2009. "Using Real-Time Output Gaps To Examine Past And Future Policy Choices," National Institute Economic Review, National Institute of Economic and Social Research, vol. 210(1), pages 98-110, October.
    12. Jaqueson K. Galimberti & Marcelo L. Moura, 2011. "Improving the reliability of real-time Hodrick-Prescott filtering using survey forecasts," Centre for Growth and Business Cycle Research Discussion Paper Series 159, Economics, The Univeristy of Manchester.
    13. Muriel Nguiffo-Boyom, 2008. "A monthly indicator of Economic activity for Luxembourg," BCL working papers 31, Central Bank of Luxembourg.
    14. Andrew P Blake & Fabrizio Zampolli, 2006. "Optimal monetary policy in Markov-switching models with rational expectations agents," Bank of England working papers 298, Bank of England.
    15. Marcellino, Massimiliano & Musso, Alberto, 2010. "Real time estimates of the euro area output gap: reliability and forecasting performance," Working Paper Series 1157, European Central Bank.
    16. Blake, Andrew P. & Zampolli, Fabrizio, 2011. "Optimal policy in Markov-switching rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1626-1651, October.

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