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Real-time output gaps in the estimation of Taylor rules: A red herring?


  • Christopher Adam
  • David Cobham


Real-time, quasi-real, `nearly real` and full sample output gaps for the UK, generated by linear and quadratic, Hodrick-Prescott filter and unobserved components (UC-ARIMA) techniques, are presented and analysed. Particular attention is paid to the behaviour of the different series during the large fluctuations of the late 1980s and early 1990s, and the implied underlying trends of potential output are identified. In that period the rolling-time estimation of the real time and quasi-real gaps involves systematic distortion. After 1994, by contrast, the various measures are closer together, and the choice between them is less important. None of these measures corresponds precisely to what researchers would like - the output gap as understood at the time by policymakers - which it seems nearly impossible to identify with (non-spurious) precision but, given the nature and purpose of Taylor rule estimations, imperfect measures are acceptable. For periods with large swings researchers should settle for the nearly real series, while for more stable periods the choice of measure makes little difference.

Suggested Citation

  • Christopher Adam & David Cobham, 2004. "Real-time output gaps in the estimation of Taylor rules: A red herring?," Economics Series Working Papers 218, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:218

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    References listed on IDEAS

    1. Christopher Adam & David Cobham & Eric Girardin, 2005. "Monetary Frameworks and Institutional Constraints: UK Monetary Policy Reaction Functions, 1985-2003," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 497-516, August.
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    Cited by:

    1. Flamini Alessandro & Milas Costas, 2011. "Real-Time Optimal Monetary Policy with Undistinguishable Model Parameters and Shock Processes Uncertainty," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(2), pages 1-43, March.
    2. Anthony Garratt & Kevin Lee & Emi Mise & Kalvinder Shields, 2006. "Real Time Representation of the UK Output Gap in the Presence of Trend Uncertainty," Birkbeck Working Papers in Economics and Finance 0618, Birkbeck, Department of Economics, Mathematics & Statistics.
    3. Berlemann, Michael & Hilscher, Kai, 2010. "Effective monetary policy conservatism: A comparison of 11 OECD countries," HWWI Research Papers 2-21, Hamburg Institute of International Economics (HWWI).
    4. Berlemann, Michael & Hielscher, Kai, 2011. "A Time-varying Indicator of Effective Monetary Policy Conservatism," Working Paper 112/2011, Helmut Schmidt University, Hamburg.
    5. Ram Sharan Kharel & Christopher Martin & Costas Milas, 2010. "The Complex Response Of Monetary Policy To The Exchange Rate," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(1), pages 103-117, February.
    6. Michael Berlemann & Kai Hielscher, 2016. "Measuring Effective Monetary Policy Conservatism of Central Banks: A Dynamic Approach," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 105-132, May.
    7. Berlemann, Michael & Hielscher, Kai, 2009. "Measuring Effective Monetary Policy Conservatism," Working Paper 89/2009, Helmut Schmidt University, Hamburg.
    8. Nikolay Markov & Thomas Nitschka, 2013. "Estimating Taylor Rules for Switzerland: Evidence from 2000 to 2012," Working Papers 2013-08, Swiss National Bank.
    9. Garratt, Anthony & Lee, Kevin & Mise, Emi & Shields, Kalvinder, 2009. "Real time representation of the UK output gap in the presence of model uncertainty," International Journal of Forecasting, Elsevier, vol. 25(1), pages 81-102.
    10. Christopher Adam & David Cobham, 2009. "Using Real-Time Output Gaps To Examine Past And Future Policy Choices," National Institute Economic Review, National Institute of Economic and Social Research, vol. 210(1), pages 98-110, October.
    11. Michael Berlemann & Kai Hielscher, 2013. "Effective Monetary Policy Conservatism: A Comparison of 13 OECD Countries," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(3), pages 267-290, July.

    More about this item


    Output Gap; Real-Time; Quasi-Real; Nearly Real; Taylor Rules;

    JEL classification:

    • 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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