IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/03-8.html
   My bibliography  Save this paper

Comparing Alternative Output-Gap Estimators: A Monte Carlo Approach

Author

Listed:
  • Andrew Rennison

Abstract

The author evaluates the ability of a variety of output-gap estimators to accurately measure the output gap in a model economy. A small estimated model of the Canadian economy is used to generate artificial data. Using output and inflation data generated by this model, the author uses each output-gap estimation methodology to construct an estimate of the true output gap. He then evaluates the methodologies by comparing their respective estimates of the output gap with the true gap. The estimators are evaluated on the basis of correlations between the actual and estimated output gap, as well as the root-mean-squared estimation error. The author also varies the properties of potential output and the output gap in the data-generating process to test the robustness of his results. His findings indicate that an estimator that combines the Hodrick-Prescott filter with a Blanchard-Quah structural vector autoregression (SVAR) yields an estimate that is accurate compared with competing methods at the end-of-sample. He also finds that the performance of the SVAR relative to that of other methodologies is quite robust to violations in the identifying assumptions of the SVAR.

Suggested Citation

  • Andrew Rennison, 2003. "Comparing Alternative Output-Gap Estimators: A Monte Carlo Approach," Staff Working Papers 03-8, Bank of Canada.
    • Handle: RePEc:bca:bocawp:03-8
    as

    Download full text from publisher

    File URL: https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp03-8.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jean-Philippe Cayen & Simon van Norden, 2002. "La fiabilité des estimations de l'écart de production au Canada," Staff Working Papers 02-10, Bank of Canada.
    2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    3. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-368, July.
    4. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
    5. Wecker, William E, 1979. "Predicting the Turning Points of a Time Series," The Journal of Business, University of Chicago Press, vol. 52(1), pages 35-50, January.
    6. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-247, July-Sept.
    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. Lütkepohl, Helmut & POSKITT, D.S., 1996. "Testing for Causation Using Infinite Order Vector Autoregressive Processes," Econometric Theory, Cambridge University Press, vol. 12(1), pages 61-87, March.
    9. Ehlgen, Jurgen, 1998. "Distortionary effects of the optimal Hodrick-Prescott filter," Economics Letters, Elsevier, vol. 61(3), pages 345-349, December.
    10. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
    11. Canova, Fabio, 1994. "Detrending and turning points," European Economic Review, Elsevier, vol. 38(3-4), pages 614-623, April.
    12. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    13. Stephen Murchison, "undated". "NAOMI A New Quarterly Forecasting Model Part II: A Guide to Canadian NAOMI," Working Papers-Department of Finance Canada 2001-25, Department of Finance Canada.
    14. Maral Kichian, 1999. "Measuring Potential Output within a State-Space Framework," Staff Working Papers 99-9, Bank of Canada.
    15. Guay, A & St-Amant, P, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Working Papers-Department of Finance Canada 1996-2, Department of Finance Canada.
    16. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, vol. 18(1), pages 49-75, July.
    17. Peter K. Clark, 1987. "The Cyclical Component of U. S. Economic Activity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(4), pages 797-814.
    18. Pierre St-Amant & Simon van Norden, 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
    19. repec:cup:etheor:v:12:y:1996:i:1:p:61-87 is not listed on IDEAS
    20. Cooley, Thomas F. & Dwyer, Mark, 1998. "Business cycle analysis without much theory A look at structural VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88.
    Full references (including those not matched with items on IDEAS)

    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. 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.
    2. 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.
    3. Jean-Philippe Cayen & Simon van Norden, 2002. "La fiabilité des estimations de l'écart de production au Canada," Staff Working Papers 02-10, Bank of Canada.
    4. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 583-601, June.
    5. Maral Kichian, 1999. "Measuring Potential Output within a State-Space Framework," Staff Working Papers 99-9, Bank of Canada.
    6. Paolo Guarda, 2002. "Potential output and the output gap in Luxembourg: some alternative methods," BCL working papers 4, Central Bank of Luxembourg.
    7. Arabinda Basistha, 2007. "Trend-cycle correlation, drift break and the estimation of trend and cycle in Canadian GDP," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 584-606, May.
    8. Vashchelyuk, N.V. (Ващелюк, Н.В.) & Zubarev, Andrey (Зубарев, Андрей) & Trunin, Pavel (Трунин, Павел), 2016. "Determination of the Output Gap for the Russian Economy [Определение Разрыва Выпуска Для Российской Экономики]," Working Papers 2137, Russian Presidential Academy of National Economy and Public Administration.
    9. Günes Kamber & James Morley & Benjamin Wong, 2018. "Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter," The Review of Economics and Statistics, MIT Press, vol. 100(3), pages 550-566, July.
    10. Luis Gonzalo Llosa & Shirley Miller, 2004. "Using Additional Information in Estimating the Output Gap in Peru: a Multivariate Unobserved Component Approach," Money Affairs, CEMLA, vol. 0(1), pages 57-82, January-J.
    11. Sergey Sinelnikov-Murylev & Sergey Drobyshevsky & Maria Kazakova & Michael Alexeev, 2016. "Decomposition of Russia's GDP Growth Rates," Research Paper Series, Gaidar Institute for Economic Policy, issue 167P, pages 123-123.
    12. Basistha, Arabinda & Nelson, Charles R., 2007. "New measures of the output gap based on the forward-looking new Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 498-511, March.
    13. Marc-André Gosselin & René Lalonde, 2002. "Une approche éclectique d'estimation du PIB potentiel américain," Staff Working Papers 02-36, Bank of Canada.
    14. Dupasquier, Chantal & Guay, Alain & St-Amant, Pierre, 1999. "A Survey of Alternative Methodologies for Estimating Potential Output and the Output Gap," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 577-595, July.
    15. Ángel Guillén & Gabriel Rodríguez, 2014. "Trend-cycle decomposition for Peruvian GDP: application of an alternative method," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 23(1), pages 1-44, December.
    16. Zsolt Darvas & Gábor Vadas, 2003. "Univariate Potential Output Estimations for Hungary," MNB Working Papers 2003/8, Magyar Nemzeti Bank (Central Bank of Hungary).
    17. Pierre St-Amant & Simon van Norden, 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
    18. Tommaso Proietti, 2002. "Some Reflections on Trend-Cycle Decompositions with Correlated Components," Econometrics 0209002, University Library of Munich, Germany.
    19. Guérin, Pierre & Maurin, Laurent & Mohr, Matthias, 2015. "Trend-Cycle Decomposition Of Output And Euro Area Inflation Forecasts: A Real-Time Approach Based On Model Combination," Macroeconomic Dynamics, Cambridge University Press, vol. 19(2), pages 363-393, March.
    20. Nelson, Charles R., 2008. "The Beveridge-Nelson decomposition in retrospect and prospect," Journal of Econometrics, Elsevier, vol. 146(2), pages 202-206, October.

    More about this item

    Keywords

    Business fluctuations and cycles; Econometric and statistical methods; Potential output;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    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:bca:bocawp:03-8. 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: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bocgvca.html .

    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.