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Estimates of the output gap in real time: how well have we been doing?

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Abstract

This paper addresses the real-time versus ex-post properties of the output gap as quantified by the Reserve Bank of New Zealand's multivariate (MV) filter, starting with the second quarter of 1997, when the current procedure was implemented. There are three sources of revisions of the output gap: revisions of real GDP data, the end point problem of symmetric filters and changes to the calibration of the MV filter. The performance of the output gap with respect to signalling inflationary pressure, as measured by future non- tradables inflation, has been reasonably good, both in real time and ex post. However, during the recorded history of the MV filter, the revisions to real-time output gap have been no smaller than had a standard Hodrick-Prescott (HP) filter been used. Moreover, the MV filter leads to permanently different levels of the output gap estimates if compared to a purely statistical trend. The MV filter is a hybrid construct. The empirical reference to indicators of inflationary pressure distances it from the original concept of the output gap, where a deviation of observed from potential output is taken as a cause of inflationary pressure. There is some indication that a major recalibration of the MV filter in 2002 helped to maintain the correlation with a target variable that it is supposed to "explain".

Suggested Citation

  • Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/04, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2004/04
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Graff, 2005. "Internationale Konjunkturverbunde," KOF Working papers 05-108, KOF Swiss Economic Institute, ETH Zurich.
    2. Timothy Irwin & Oscar Parkyn, 2009. "Improving the Management of the Crown’s Exposure to Risk," Treasury Working Paper Series 09/06, New Zealand Treasury.
    3. Alfred Guender & Yu Xie, 2007. "Is there an exchange rate channel in the forward-looking Phillips curve? A theoretical and empirical investigation," New Zealand Economic Papers, Taylor & Francis Journals, vol. 41(1), pages 5-28.
    4. Rodrigo Fuentes S. & Fabián Gredig U. & Mauricio Larraín E., 2008. "The output Gap in chile: Measurement and Evaluation," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(2), pages 7-30, August.
    5. Graff Michael, 2006. "Internationale Konjunkturverbunde / International Business Cycles," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 226(4), pages 385-417, August.
    6. David Hargreaves & Hannah Kite & Bernard Hodgetts, 2006. "Modelling New Zealand inflation in a Phillips curve," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, September.
    7. Michael Graff, 2006. "Ein multisektoraler Sammelindikator für die Schweizer Konjunktur," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 142(IV), pages 529-577, December.
    8. Mohamed A. Osman & Rosmy Jean Louis & Faruk Balli, 2009. "Output gap and inflation nexus: the case of United Arab Emirates," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 1(1), pages 118-135.
    9. Rodrigo Fuentes & Fabián Gredig & Mauricio Larraín, 2008. "La brecha de producto en Chile: medición y evaluación," Investigación Conjunta-Joint Research,in: Centro de Estudios Monetarios Latinoamericanos (CEMLA) (ed.), Estimación y Uso de Variables no Observables en la Región, edition 1, volume 1, chapter 3, pages 69-102 Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    10. Jan-Egbert Sturm & Michael Graff, 2009. "Schätzung der Outputlücke," KOF Analysen, KOF Swiss Economic Institute, ETH Zurich, vol. 3(2), pages 55-67, June.
    11. Michael Graff, 2010. "Does a multi-sectoral design improve indicator-based forecasts of the GDP growth rate? Evidence from Switzerland," Applied Economics, Taylor & Francis Journals, vol. 42(21), pages 2759-2781.
    12. Rodrigo Fuentes & Fabián Gredig & Mauricio Larraín, 2007. "Estimating the Output Gap for Chile," Working Papers Central Bank of Chile 455, Central Bank of Chile.
    13. Dan Armeanu & Georgiana Camelia Crețan & Leonard Lache & Mihaela Mitroi, 2015. "Estimating Potential GDP for the Romanian Economy and Assessing the Sustainability of Economic Growth: A Multivariate Filter Approach," Sustainability, MDPI, Open Access Journal, vol. 7(3), pages 1-21, March.
    14. L Christopher Plantier & Ozer Karagedikli, 2005. "Do so-called multivariate filters have better revision properties? An empirical analysis," Computing in Economics and Finance 2005 250, Society for Computational Economics.
    15. Ashley Lienert & David Gillmore, 2015. "The Reserve Bank's method of estimating "potential output"," Reserve Bank of New Zealand Analytical Notes series AN2015/01, Reserve Bank of New Zealand.
    16. Aaron Drew & Rishab Sethi, 2007. "The transmission mechanism of New Zealand monetary policy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 70, June.

    More about this item

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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