SUMMARYWe study the effects of growth volatility and inflation volatility on average rates of output growth and inflation for post-war US data. Our results suggest that increased growth uncertainty is associated with significantly lower average growth, while higher inflation uncertainty is significantly negatively correlated with lower output growth and lower average inflation. Both inflation and growth display evidence of significant asymmetric response to positive and negative shocks of equal magnitude.
Methods are described for the appropriate use of data obtained and analysed in real time to represent the output gap. The methods employ cointegrating VAR techniques to model real time measures and realisations of output series jointly. The model is used to mitigate the impact of data revisions; to generate appropriate forecasts that can deliver economically-meaningful output trends and that can take into account the end-of-sample problems encountered in measuring these trends; and to calculate probability forecasts that convey in a clear way the uncertainties associated with the gap measures. The methods are applied to data for the US 1965q4-2004q4 and the improvements over standard methods are illustrated.
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