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Combining Hodrick-Prescott Filtering with a Production Function Approach to Estimate Output Gap

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  • Marta Areosa

Abstract

Many models were used to identify the factors affecting the demand for overnight funds by commercial banks. Theses models overcome overdispersion problems caused by excess of zeros found in the dataset. Generalized Linear Latent and Mixed Models (GLLAMM) constitute a class of models which allows the identification of both the direct and indirect effects of rediscount rate through the inclusion of random effects in the intercept (incorporating specific effects for each bank) and other coefficients (identifying individual behavior of each bank regarding the same stimuli). The results suggest the use of overnight funds is mainly influenced by the opening amount in bank reserves, by the net value of operations in the SELIC clearinghouse, by the rediscount rate, by the volatility of in bank reserves and by the reserve requirements on demand deposits.The proposed methodology combines two of the most important techniques to estimate output gap: the production function approach and the Hodrick-Prescott .ltering. Three main advantages can be derived from this method: (i) it adds some economic structure to a .filtering method, (ii) it can be easily adapted to incorporate new characteristics into the filter and (iii) it simultaneously produces estimates for potential output and its unobservable components.

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  • Marta Areosa, 2008. "Combining Hodrick-Prescott Filtering with a Production Function Approach to Estimate Output Gap," Working Papers Series 172, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:172
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps172.pdf
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    References listed on IDEAS

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    1. Tommaso Proietti & Alberto Musso & Thomas Westermann, 2007. "Estimating potential output and the output gap for the euro area: a model-based production function approach," Empirical Economics, Springer, vol. 33(1), pages 85-113, July.
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    9. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
    10. Sweta Chaman Saxena & Valerie Cerra, 2000. "Alternative Methods of Estimating Potential Output and the Output Gap; An Application to Sweden," IMF Working Papers 00/59, International Monetary Fund.
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    Cited by:

    1. Aaron G. Grech, "undated". "Investigating potential output using the Hodrick-Prescott filter: an application for Malta," CBM Working Papers WP/02/2014, Central Bank of Malta.

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