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How the baby boomers' retirement wave distorts model‐based output gap estimates*

* This paper is a replication of an original study

Author

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  • Maik H. Wolters

Abstract

This paper illustrates, based on an example, the importance of consistency between empirical measurement and the concept of variables in estimated macroeconomic models. Since standard New Keynesian models do not account for demographic trends and sectoral shifts, I propose adjusting hours worked per capita used to estimate such models accordingly to enhance the consistency between the data and the model. Without this adjustment, low‐frequency shifts in hours lead to unreasonable trends in the output gap, caused by the close link between hours and the output gap in such models. The retirement wave of baby boomers, for example, lowers US aggregate hours per capita, which leads to erroneous permanently negative output gap estimates following the Great Recession. After correcting hours for changes in the age composition, the estimated output gap closes gradually instead following the years after the Great Recession.

Suggested Citation

  • Maik H. Wolters, 2018. "How the baby boomers' retirement wave distorts model‐based output gap estimates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(5), pages 680-689, August.
    • Handle: RePEc:wly:japmet:v:33:y:2018:i:5:p:680-689
    DOI: 10.1002/jae.2636
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    Citations

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    Cited by:

    1. Jannsen, Nils & Wolters, Maik H., 2016. "Zu Produktionspotenzial und Produktionslücke in den Vereinigten Staaten," Kiel Insight 2016.2, Kiel Institute for the World Economy (IfW Kiel).
    2. Elstner, Steffen & Feld, Lars P. & Schmidt, Christoph M., 2018. "The German productivity paradox: Facts and explanations," Ruhr Economic Papers 767, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Fair, Ray C., 2020. "Variable mismeasurement in a class of DSGE models: Comment," Journal of Macroeconomics, Elsevier, vol. 66(C).
    4. Yasuo Hirose & Takeki Sunakawa, 2023. "The Natural Rate of Interest in a Non-linear DSGE Model," International Journal of Central Banking, International Journal of Central Banking, vol. 19(1), pages 301-340, March.
    5. Josefine Quast & Maik H. Wolters, 2022. "Reliable Real-Time Output Gap Estimates Based on a Modified Hamilton Filter," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(1), pages 152-168, January.

    Replication

    This item is a replication of:
  • Neville Francis & Valerie A. Ramey, 2009. "Measures of per Capita Hours and Their Implications for the Technology-Hours Debate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1071-1097, September.

    • More about this item

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. How the baby boomers' retirement wave distorts model‐based output gap estimates (Journal of Applied Econometrics 2018) in ReplicationWiki

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