A Menu on Output Gap Estimation Methods

Álvarez, Luis J.; Gómez‐Loscos, Ana

doi:10.2139/ssrn.2973768

Cited by 12 publications

(15 citation statements)

References 79 publications

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“…Reflecting these variations, the most commonly used methods to estimate potential output and the output gap range from purely statistical univariate filters to fully structural Bayesian estimation of large Dynamic Stochastic General Equilibrium (DSGE) models. All these methods have conceptual or practical strengths and weaknesses (see Blagrave and others, 2015;Álvarez and Gómez-Loscos, 2018).…”

Section: A Estimation Methodsmentioning

confidence: 99%

How Informative Are Real Time Output Gap Estimates in Europe?

et al. 2019

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We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy’s potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities’ real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.

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Section: A Estimation Methodsmentioning

confidence: 99%

How Informative Are Real Time Output Gap Estimates in Europe?

et al. 2019

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“…The HP filter, however, exhibits some limitations. The prior requirement and arbitrary determination of the parameter (λ) that penalizes smoothness versus fit (Álvarez & Gómez-Loscos, 2018), poor behaviour in recent observations (Álvarez & Gómez-Loscos, 2018;Caporale et al, 2018), spurious cycles for series with classic spectral shape (Álvarez & Gómez-Loscos, 2018) and the specificity to the United States data and economic structure that may not fit other economies (Caporale et al, 2018;Sarikaya, Ogunc, Ece, Kara, & Ozlale, 2005) are some of the key limitations of the HP filter.…”

Section: Output Gapmentioning

confidence: 99%

Is the interest rate setting behaviour of the Bank of Ghana constrained by high debt levels?

Iddrisu

Alagidede

2020

African Development Review

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While assertions of debt constraints on monetary policy have been documented in the literature, empirical investigation into this phenomenon remains egregiously limited, with the only study using the Generalized Method of Moments that fails to provide confidence intervals for the threshold estimate. We examine whether or not high debt levels constrain the interest rate setting behaviour of the Bank of Ghana, with the aid of sample splitting and a threshold estimation technique that overcomes the weaknesses of previous studies. We find that monetary policy response to inflation gap in the high debt regime (above the debt to gross domestic product [GDP] threshold of 35.1%) is woefully disproportionate, a key indication of debt constraint and inflation accommodation by a central bank that is supposed to be targeting inflation. Important policy recommendations are proffered.

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“…Even though, as discussed above, there are many theoretical channels that explain inflation interdependence, the evidence on the synchronization of inflation dynamics is very limited, in 2 See, for instance, Kose et al (2008) or de Haan et al (2008). 3 Other contributions include Neely and Rapach (2011), Mumtaz and Surico (2012) or Forster and Tillmann (2014). Carriero et al (2018) analyze the global component of inflation volatility.…”

Section: Introductionmentioning

confidence: 99%

“…2 Early attempts at documenting inflation comovements, such as in Wang and Wen (2007) or Henriksen et al (2013), have relied on Pearson correlation coefficients between country pairs and clearly show that headline inflation rates between any country pairs are positively correlated. A related strand of literature, following the seminal work by Cicarelli and Mojon (2010), estimates common/latent factor models 3 and uses variance decompositions to measure the extent to which world and country-specific components explain the variation in national inflation rates.…”

Section: Introductionmentioning

confidence: 99%