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An intuitive method to improve the estimation of output gaps

Author

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  • Wilde, Wollfram
  • Beckmann, Joscha

Abstract

Standard procedures for output gap estimates, such as the Hodrick-Prescott Filter or the Production Function Method, suffer from the sample phase shift issue at the end of the sample. This often provides unstable and unreliable estimates for the current output gap. However the current estimate of output gaps is the most relevant one for monetary and fiscal policymakers. The result from time series filters lack an economic founding and tend to produce economic implausible results for the output gap. This paper introduces and evaluates a new method which is able to reduce the uncertainty of output gaps at the end of a sample while allowing for an economic interpretation of the obtained estimate. Our estimates for 12 economies show that we are able to outperform the popular production function methodology (PF) when nowcasting the current output gap.

Suggested Citation

  • Wilde, Wollfram & Beckmann, Joscha, 2018. "An intuitive method to improve the estimation of output gaps," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181636, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc18:181636
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    References listed on IDEAS

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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. 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.
    3. Mankiw, N. Gregory, 1987. "The optimal collection of seigniorage : Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 327-341, September.
    4. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
    5. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 25(Win), pages 2-11.
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    More about this item

    Keywords

    Output Gap; Policy Evaluation;

    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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