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Measuring Output Gap Uncertainty

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  • Anthony Garratt
  • James Mitchell
  • Shaun P. Vahey

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We propose a methodology for producing density forecasts for the output gap in real time using a large number of vector autoregessions in inflation and output gap measures. Density combination utilizes a linear mixture of experts framework to produce potentially non-Gaussian ensemble densities for the unobserved output gap. In our application, we show that data revisions alter substantially our probabilistic assessments of the output gap using a variety of output gap measures derived from univariate detrending filters. The resulting ensemble produces well-calibrated forecast densities for US inflation in real time, in contrast to those from simple univariate autoregressions which ignore the contribution of the output gap. Combining evidence from both linear trends and more flexible univariate detrending filters induces strong multi-modality in the predictive densities for the unobserved output gap. The peaks associated with these two detrending methodologies indicate output gaps of opposite sign for some observations, reflecting the pervasive nature of model uncertainty in our US data.

Suggested Citation

  • Anthony Garratt & James Mitchell & Shaun P. Vahey, 2009. "Measuring Output Gap Uncertainty," Birkbeck Working Papers in Economics and Finance 0909, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:0909
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    File URL: https://eprints.bbk.ac.uk/id/eprint/7613
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    Cited by:

    1. Ravazzolo Francesco & Vahey Shaun P., 2014. "Forecast densities for economic aggregates from disaggregate ensembles," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(4), pages 1-15, September.
    2. Paulo Mauricio Sánchez Beltrán & Luis Fernando Melo Velandia, 2013. "Combinación de brechas del producto colombiano," Borradores de Economia 10973, Banco de la Republica.
    3. Wolden Bache, Ida & Sofie Jore, Anne & Mitchell, James & Vahey, Shaun P., 2011. "Combining VAR and DSGE forecast densities," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1659-1670, October.
    4. Knut Are Aastveit & Karsten R. Gerdrup & Anne Sofie Jore & Leif Anders Thorsrud, 2014. "Nowcasting GDP in Real Time: A Density Combination Approach," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 32(1), pages 48-68, January.
    5. Paulo M. Sánchez & Luis Fernando Melo, 2013. "Combinación de brechas del producto colombiano," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 31(72), pages 74-82, December.
    6. Guérin, Pierre & Maurin, Laurent & Mohr, Matthias, 2015. "Trend-Cycle Decomposition Of Output And Euro Area Inflation Forecasts: A Real-Time Approach Based On Model Combination," Macroeconomic Dynamics, Cambridge University Press, vol. 19(2), pages 363-393, March.
    7. Juan Manuel Julio, 2011. "Data Revisions and the Output Gap," Borradores de Economia 7956, Banco de la Republica.
    8. Garratt, Anthony & Mitchell, James & Vahey, Shaun P. & Wakerly, Elizabeth C., 2011. "Real-time inflation forecast densities from ensemble Phillips curves," The North American Journal of Economics and Finance, Elsevier, vol. 22(1), pages 77-87, January.
    9. Xueting Yu & Yuhan Zhu & Guangming Lv, 2020. "Analysis of the Impact of China’s GDP Data Revision on Monetary Policy from the Perspective of Uncertainty," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(6), pages 1251-1274, May.
    10. Ida Wolden Bache & James Mitchell & Francesco Ravazzolo & Shaun P. Vahey, 2009. "Macro modelling with many models," Working Paper 2009/15, Norges Bank.
    11. Marcellino, Massimiliano & Musso, Alberto, 2010. "The Forecasting Performance of Real Time Estimates of the Euro Area Output Gap," CEPR Discussion Papers 7763, C.E.P.R. Discussion Papers.
    12. Mamdouh Abdelmoula M. ABDELSALAM, 2017. "Improving Phillips Curve’s Inflation Forecasts under Misspecification," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 54-76, September.
    13. Francesco Ravazzolo & Shaun P Vahey, 2010. "Measuring Core Inflation in Australia with Disaggregate Ensembles," RBA Annual Conference Volume (Discontinued), in: Renée Fry & Callum Jones & Christopher Kent (ed.),Inflation in an Era of Relative Price Shocks, Reserve Bank of Australia.

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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