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Real Time Representation of the UK Output Gap in the Presence of Trend Uncertainty

  • Anthony Garratt

    (Department of Economics, Mathematics & Statistics, Birkbeck)

  • Kevin Lee
  • Emi Mise
  • Kalvinder Shields

This paper describes an approach that accommodates in a coherent way three types of uncertainty when measuring the output gap. These are trend uncertainty (associated with the choice of model and de-trending technique), estimation uncertainty (with a given model) and data uncertainty (associated with the reliability of data). The approach employs VAR models to explain real time measures and realisations of output series jointly along with Bayesian-style ‘model averaging’ procedures. Probability forecasts provide a comprehensive representation of the output gap and the associated uncertainties in real time. The approach is illustrated using a real time dataset for the UK over 1961q2 — 2005q4.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0618.pdf
File Function: First version, 2006
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0618.

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Date of creation: Dec 2006
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Handle: RePEc:bbk:bbkefp:0618
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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
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  4. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
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  6. Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
  7. Norman R. Swanson & Jeffery D. Amato, 2000. "The real-time predictive content of money for output," BIS Working Papers 96, Bank for International Settlements.
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  9. David Cobham & Christopher Adam, 2005. "Real-time output gaps in the estimation of Taylor rules: A red herring?," Money Macro and Finance (MMF) Research Group Conference 2005 42, Money Macro and Finance Research Group.
  10. Alex Cukierman & Stefan Gerlach, 2003. "The inflation bias revisited: theory and some international evidence," Manchester School, University of Manchester, vol. 71(5), pages 541-565, 09.
  11. Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
  12. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
  13. Kevin Lee & Emi Mise & Kalvinder Shields & Tony Garratt, 2005. "Real time Representations of the Output Gap," Money Macro and Finance (MMF) Research Group Conference 2005 26, Money Macro and Finance Research Group.
  14. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2006. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, number 9780199296859, March.
  15. M. Hashem Pesaran, 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," CESifo Working Paper Series 345, CESifo Group Munich.
  16. Shaun Vahey & Tony Garratt, 2005. "UK Real-time Macro Data Characteristics," Computing in Economics and Finance 2005 253, Society for Computational Economics.
  17. Svensson, Lars E. O., 2002. "Inflation targeting: Should it be modeled as an instrument rule or a targeting rule?," European Economic Review, Elsevier, vol. 46(4-5), pages 771-780, May.
  18. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  19. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  20. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
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