Estimating the Output Gap in a Changing Economy

Abstract

Univariate filters used in output gap estimation are subject to criticism as being purely statistical and having no economic content. The information content of the output gap measures estimated by standard multivariate filtering techniques, on the other hand, can be distorted because of the possibly unrealistic restriction that system parameters stay constant over time. In this study, we seek to address these shortcomings by proposing an output gap estimation method that takes into account changing economic relations. We employ a nonlinear time series framework along with the extended Kalman filter, in which economic content is used by inflation and output gap dynamics and the parameters are allowed to be time varying. We use the Turkish economy as a laboratory to show that our method provides useful results, both in terms of the properties of output gap estimates and for the assessment of change in macroeconomic dynamics.

To Cut or Not to Cut? That is the (Central Bank’s) Question in Search of the Neutral Interest Rate in Latin America

“…, are expressed as a function of its lags given the slow reaction of real GDP, lagged deviations of the actual real monetary policy rate from the NRIR, as given by (in both cases we use one lag), and a vector with control variables for the output gap, , (cyclical deviations of the real exchange rate estimated using an HP-filter; see Kara et al (2007) for details). The disturbance term, ε , is a zero-mean white noise process with variance σ .…”

How credible are Okun coefficients? The gap version of Okun’s law for G7 economies

“…Save for the Hamilton filter, there have been various multivariate extensions to these methods, such as the multivariate Beveridge–Nelson filter (Evans and Reichlin 1994 ), the multivariate Hodrick–Prescott filter with a multitude of forms (Laxton and Tetlow 1992 ; Dermoune et al 2009 ; Poloni and Sbrana 2017 ) or a system-wise formulation of the unobserved component model (e.g. Apel and Jansson 1999 ; Kara et al 2007 ). Some of these multivariate extensions take a semi-structural perspective, for instance, we directly implement macroeconomic regularities such as the Phillips curve or Okun’s law, often with a priori pre-set coefficients (e.g.…”

Symmetric and Asymmetric Dynamics of Output Gap and Inflation Relation for Turkish Economy

“…For example, Öğünç and Sarıkaya (2011), Alp et al (2012), Coşar et al (2013) and Saraçoğlu et al (2014) have pointed out that the output gap is an appropriate tool to explain infl ation dynamics and that the backward-looking indexation is dominant in infl ation expectations. Correspondingly, Özbek and Özlale (2005), Kara et al (2007), Şahinöz and Atabek (2016), Akkoç (2018), Andıç (2018), and Kayacan and Birecikli (2018) have focused on the alternative output gap measurements. The above studies on the Turkish economy implicitly act on linear assumptions and do not consider asymmetry.…”