IDEAS home Printed from https://ideas.repec.org/a/eee/intfor/v25y2009i1p81-102.html
   My bibliography  Save this article

Real time representation of the UK output gap in the presence of model uncertainty

Author

Listed:
  • Garratt, Anthony
  • Lee, Kevin
  • Mise, Emi
  • Shields, Kalvinder

Abstract

We undertake an empirical analysis of the UK output gap using real-time data and an approach that accommodates, in a coherent way, three types of uncertainty when measuring the gap. These are model uncertainty (associated with the choice of model and de-trending technique), estimation uncertainty (with a given model) and measurement uncertainty (associated with the reliability of the data). The approach employs VAR models, along with Bayesian-style 'model averaging' procedures, to jointly explain and forecast real-time measures and realisations of output series. A comprehensive representation of the UK output gap and the associated uncertainties are provided in real time by probability forecasts over 1961q2-2005q4.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:intfor:v:25:y:2009:i:1:p:81-102
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0169-2070(08)00137-4
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Harvey, Andrew C. & Trimbur, Thomas M. & Van Dijk, Herman K., 2007. "Trends and cycles in economic time series: A Bayesian approach," Journal of Econometrics, Elsevier, vol. 140(2), pages 618-649, October.
    2. Evan F. Koenig & Sheila Dolmas & Jeremy Piger, 2003. "The Use and Abuse of Real-Time Data in Economic Forecasting," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 618-628, August.
    3. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
    4. Orphanides, Athanasios & Porter, Richard D. & Reifschneider, David & Tetlow, Robert & Finan, Frederico, 2000. "Errors in the measurement of the output gap and the design of monetary policy," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 117-141.
    5. Anthony Garratt & Shaun P Vahey, 2006. "UK Real-Time Macro Data Characteristics," Economic Journal, Royal Economic Society, vol. 116(509), pages 119-135, February.
    6. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126, National Bureau of Economic Research, Inc.
    7. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    8. Christopher Adam & David Cobham & University of St. Andrews, 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.
    9. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, May.
    10. David I. Harvey & Paul Newbold, 2005. "Forecast Encompassing and Parameter Estimation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 815-835, December.
    11. repec:pri:cepsud:84svensson is not listed on IDEAS
    12. Garrat, A. & Lee, K. & Pesaran, M.H. & Shin, Y., 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," Cambridge Working Papers in Economics 0004, Faculty of Economics, University of Cambridge.
    13. Simon van Norden, 2002. "Filtering for Current Analysis," Staff Working Papers 02-28, Bank of Canada.
    14. Alex Cukierman & Stefan Gerlach, 2003. "The inflation bias revisited: theory and some international evidence," Manchester School, University of Manchester, vol. 71(5), pages 541-565, September.
    15. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    16. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    17. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    18. Patterson, Kerry D & Heravi, Saeed M, 1991. "Data Revisions and the Expenditure Components of GDP," Economic Journal, Royal Economic Society, vol. 101(407), pages 887-901, July.
    19. N. Kundan Kishor & Evan F. Koenig, 2009. "VAR Estimation and Forecasting When Data Are Subject to Revision," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(2), pages 181-190, July.
    20. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
    21. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    22. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2012. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, number 9780199650460.
    23. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    24. Patterson, Kerry, 2002. "The Data Measurement Process for UK GNP: Stochastic Trends, Long Memory, and Unit Roots," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 21(4), pages 245-264, July.
    25. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    26. Mr. Melvyn Weeks & Mr. Mark R. Stone, 2001. "Systemic Financial Crises, Balance Sheets, and Model Uncertainity," IMF Working Papers 2001/162, International Monetary Fund.
    27. Anthony Garratt & Kevin Lee & Emi Mise & Kalvinder Shields, 2008. "Real-Time Representations of the Output Gap," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 792-804, November.
    28. M. Hashem Pesaran & Paolo Zaffaroni, 2004. "Model Averaging and Value-at-Risk Based Evaluation of Large Multi Asset Volatility Models for Risk Management," CESifo Working Paper Series 1358, CESifo.
    29. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409, National Bureau of Economic Research, Inc.
    30. Alastair Cunningham & Chris Jeffery & George Kapetanios & Vincent Labhard, 2007. "A State Space Approach To The Policymaker's Data Uncertainty Problem," Money Macro and Finance (MMF) Research Group Conference 2006 168, Money Macro and Finance Research Group.
    31. Patterson, K. D. & Heravi, S. M., 1991. "Are different vintages of data on the components of GDP co-integrated? : Some evidence for the United Kingdom," Economics Letters, Elsevier, vol. 35(4), pages 409-413, April.
    32. Brunner, Allan D, 2000. "On the Derivation of Monetary Policy Shocks: Should We Throw the VAR Out with the Bath Water?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 254-279, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hecq, Alain & Jacobs, Jan P.A.M. & Stamatogiannis, Michalis P., 2019. "Testing for news and noise in non-stationary time series subject to multiple historical revisions," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 396-407.
    2. Clements, Michael P. & Beatriz Galvao, Ana, 2010. "Real-time Forecasting of Inflation and Output Growth in the Presence of Data Revisions," Economic Research Papers 270771, University of Warwick - Department of Economics.
    3. Ince, Onur & Papell, David H., 2013. "The (un)reliability of real-time output gap estimates with revised data," Economic Modelling, Elsevier, vol. 33(C), pages 713-721.
    4. Jennifer Castle & David Hendry, 2012. "Forecasting by factors, by variables, or both?," Economics Series Working Papers 600, University of Oxford, Department of Economics.
    5. Anthony Garratt & Kevin Lee & Kalvinder Shields, 2018. "The role of uncertainty, sentiment and cross-country interactions in G7 output dynamics," Canadian Journal of Economics, Canadian Economics Association, vol. 51(2), pages 391-418, May.
    6. Bell, William Paul, 2009. "Adaptive interactive expectations: dynamically modelling profit expectations," MPRA Paper 38260, University Library of Munich, Germany, revised 09 Feb 2010.
    7. Michael P. Clements, 2017. "Assessing Macro Uncertainty in Real-Time When Data Are Subject To Revision," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 35(3), pages 420-433, July.
    8. Anh Dinh Minh Nguyen, 2017. "U.K. Monetary Policy under Inflation Targeting," Bank of Lithuania Working Paper Series 41, Bank of Lithuania.
    9. Carriero, Andrea & Clements, Michael P. & Galvão, Ana Beatriz, 2015. "Forecasting with Bayesian multivariate vintage-based VARs," International Journal of Forecasting, Elsevier, vol. 31(3), pages 757-768.
    10. Michael P. Clements & Ana Beatriz Galvão, 2011. "Improving Real-time Estimates of Output Gaps and Inflation Trends with Multiple-vintage Models," Working Papers 678, Queen Mary University of London, School of Economics and Finance.
    11. Garratt, Anthony & Lee, Kevin & Shields, Kalvinder, 2016. "Forecasting global recessions in a GVAR model of actual and expected output," International Journal of Forecasting, Elsevier, vol. 32(2), pages 374-390.
    12. Lee, Kevin & Shields, Kalvinder K., 2011. "Decision-making in hard times: What is a recession, why do we care and how do we know when we are in one?," The North American Journal of Economics and Finance, Elsevier, vol. 22(1), pages 43-60, January.
    13. Kevin Lee & James Morley & Kalvinder Shields & Madeleine Sui-Lay Tan, 2018. "The Australian real-time fiscal database: An overview and an illustration of its use in analysing planned and realised fiscal policies," Discussion Papers 2018/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    14. McElroy, Tucker S. & Wildi, Marc, 2020. "The Multivariate Linear Prediction Problem: Model-Based and Direct Filtering Solutions," Econometrics and Statistics, Elsevier, vol. 14(C), pages 112-130.
    15. Garratt, Anthony & Mitchell, James & Vahey, Shaun P., 2014. "Measuring output gap nowcast uncertainty," International Journal of Forecasting, Elsevier, vol. 30(2), pages 268-279.
    16. Anthony Garratt & Kevin Lee & Kalvinder Shields, 2014. "Forecasting Global Recessions in a GVAR Model of Actual and Expected Output in the G7," Discussion Papers 2014/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    17. Kevin Lee & Nilss Olekalns & Kalvinder Shields, 2013. "Meta Taylor Rules for the UK and Australia; Accommodating Regime Uncertainty in Monetary Policy Analysis Using Model Averaging Methods," Manchester School, University of Manchester, vol. 81, pages 28-53, October.
    18. Castle, Jennifer L. & Clements, Michael P. & Hendry, David F., 2013. "Forecasting by factors, by variables, by both or neither?," Journal of Econometrics, Elsevier, vol. 177(2), pages 305-319.
    19. Kevin Lee & James Morley & Kalvinder Shields, 2015. "The Meta Taylor Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 73-98, February.
    20. Clements, Michael P. & Galvão, Ana Beatriz, 2013. "Forecasting with vector autoregressive models of data vintages: US output growth and inflation," International Journal of Forecasting, Elsevier, vol. 29(4), pages 698-714.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Anthony Garratt & Kevin Lee & Emi Mise & Kalvinder Shields, 2008. "Real-Time Representations of the Output Gap," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 792-804, November.
    3. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    4. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    5. Nilss Olekalns & Kalvinder Shields, 2008. "Nowcasting, Business Cycle Dating and the Interpretation of New Information when Real Time Data are Available," Department of Economics - Working Papers Series 1040, The University of Melbourne.
    6. Kevin Lee & Nilss Olekalns & Kalvinder Shields, 2008. "Nowcasting, Business Cycle Dating and the Interpretation of New Information when Real Time Data are Available," Discussion Papers in Economics 08/17, Division of Economics, School of Business, University of Leicester.
    7. Cayen, Jean-Philippe & van Norden, Simon, 2005. "The reliability of Canadian output-gap estimates," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 373-393, December.
    8. Kevin Lee & James Morley & Kalvinder Shields, 2015. "The Meta Taylor Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 73-98, February.
    9. Kevin Lee & Nilss Olekalns & Kalvinder Shields & Zheng Wang, 2012. "Australian Real-Time Database: An Overview and an Illustration of its Use in Business Cycle Analysis," The Economic Record, The Economic Society of Australia, vol. 88(283), pages 495-516, December.
    10. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    11. Taylor, John B. & Williams, John C., 2010. "Simple and Robust Rules for Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 15, pages 829-859, Elsevier.
    12. Dean Croushore, 2011. "Frontiers of Real-Time Data Analysis," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 72-100, March.
    13. Jacobs, Jan P.A.M. & van Norden, Simon, 2011. "Modeling data revisions: Measurement error and dynamics of "true" values," Journal of Econometrics, Elsevier, vol. 161(2), pages 101-109, April.
    14. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1406-1435, July.
    15. Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.
    16. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    17. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    18. Bernhardsen, Tom & Eitrheim, Oyvind & Jore, Anne Sofie & Roisland, Oistein, 2005. "Real-time data for Norway: Challenges for monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 333-349, December.
    19. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    20. Ansgar Belke & Jens Klose, 2011. "Does the ECB Rely on a Taylor Rule During the Financial Crisis? Comparing Ex-post and Real Time Data with Real Time Forecasts," Economic Analysis and Policy, Elsevier, vol. 41(2), pages 147-171, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfor:v:25:y:2009:i:1:p:81-102. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ijforecast .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.