How Precise are Our Estimates of the Current Output Gap? New Evidence from Multivariate Estimates for the Euro-Zone
This paper investigates the precision of multivariate models of the output gap and considers their implications for the formulation of macroeconomic policy. Multivariate models identify the gap by including information from structural economic relationships, such as Okun's Law, the Phillips Curve or a production function. Several recent papers using data for the Euro zone have concluded that multivariate state-space models produce relatively precise estimates of the current output and unemployment gap, suggesting that policy makers can improve economic outcomes by reacting more strongly to estimated gaps. This paper attempts to reconcile these finding with more pessimistic results produced from a variety of other data sets and methodologies. I argue that some of the recent optimistic conclusions are due to misinterpretation of the evidence. Updated results from existing models also imply that the precision is substantially less than indicated in earlier work. I also relax some of the untested and atheoretical modeling assumptions imposed in earlier work to reduce model misspecification risk and thereby produces more meaningful measures of uncertainty. Overall, the results are broadly consistent with the "low precision"view, but confirm the apparent benefits of incorporating measures of capacity utilisation and highlight the role of model risk in production-function-based estimates.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:299. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.