Why Is It So Hard to Measure the Current Output Gap?
In order for time series estimates of the output gap to be useful to policy makers, this paper argues that two factors will be critical. First, they must be able to produce an estimate of the current output gap based only on past information. Put another way, to evaluate the performance of such estimators, we should focus on their properties as _filters_ rather than _smoothers_. Second, the decomposition of actual output into potential output and the output gap must not be based on arbitrary assumptions about the time-series behaviour of these variables. In general, this leads to a multiplicity of possible solutions that may differ greatly in their policy implications. The arbitrary selection of one of these creates arbitrary policy advice. A trivial but flexible estimator of the output gap (dubbed TOFU) can be constructed which satisfies both of the above criteria. It estimates the output gap as part of a larger economic relationship. A discussion of its properties shows that except under very strict circumstances, such time series estimates will produce better estimates of the output gap ex post than they will ex ante. Furthermore, under certain conditions, contemporary and historical data will be of no use in estimating the output gap whatsoever. This in turn places limits on the extent to which time series methods can hope to improve upon structural estimates of the output gap.
|Date of creation:||07 Jun 1995|
|Date of revision:|
|Note:||22 pages of text & 3 pages graphs. Text and Graphs in separate Postscript files. Files compressed in a single Info-zip archive, then uuencoded.|
|Contact details of provider:|| Web page: http://184.108.40.206|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
- Evans, George W. & Reichlin, Lucrezia, 1993.
"Information, Forecasts and Measurement of the Business Cycle,"
CEPR Discussion Papers
756, C.E.P.R. Discussion Papers.
- Evans, George & Reichlin, Lucrezia, 1994. "Information, forecasts, and measurement of the business cycle," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 233-254, April.
- George Evans & Lucrezia Reichlin, 1994. "Information, forecasts and measurement of the business cycle," ULB Institutional Repository 2013/10155, ULB -- Universite Libre de Bruxelles.
- Lippi, Marco & Reichlin, Lucrezia, 1994.
"VAR analysis, nonfundamental representations, blaschke matrices,"
Journal of Econometrics,
Elsevier, vol. 63(1), pages 307-325, July.
- Marco Lippi & Lucrezia Reichlin, 1994. "VAR analysis, non-fundamental representations, Blashke matrices," ULB Institutional Repository 2013/10151, ULB -- Universite Libre de Bruxelles.
- Lippi, Marco & Reichlin, Lucrezia, 1993.
"The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment,"
American Economic Review,
American Economic Association, vol. 83(3), pages 644-52, June.
- Marco Lippi & Lucrezia Reichlin, 1993. "The dynamic effects of aggregate demand and supply disturbances: comment," ULB Institutional Repository 2013/10159, ULB -- Universite Libre de Bruxelles.
- Alain DeSerres, & Alain Guay & Pierre St-Amant, . "Estimating and Projecting Potential Output Using Structural VAR Methodology: The Case of the Mexican Economy," Working Papers 95-2, Bank of Canada.
- Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
- Setterfield, M.A. & Gordon, D.V. & Osberg, L., 1990.
"Searching For A Will O'The Wisp: An Empirical Study Of The Nairu In Canada,"
Department of Economics at Dalhousie University working papers archive
90-04, Dalhousie, Department of Economics.
- Setterfield, M. A. & Gordon, D. V. & Osberg, L., 1992. "Searching for a will o' the wisp : An empirical study of the NAIRU in Canada," European Economic Review, Elsevier, vol. 36(1), pages 119-136, January.
- Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9506001. 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: (EconWPA)
If references are entirely missing, you can add them using this form.