Can inflation data improve the real‐time reliability of output gap estimates?

Christophe Planas

35 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Forecasting Techniques and Applications Unemployment and Economic Growth

Abstract

Abstract Potential output plays a central role in monetary policy and short‐term macroeconomic policy making. Yet, characterizing the output gap involves a trend‐cycle decomposition, and unobserved component estimates are typically subject to a large uncertainty at the sample end. An important consequence is that output gap estimates can be quite inaccurate in real time, as recently highlighted by Orphanides and van Norden ( 2002 ), and this causes a serious problem for policy makers. For the cases of the US, EU‐11 and two EU countries, we evaluate the benefits of using inflation data for improving the accuracy of real‐time estimates. Copyright © 2004 John Wiley & Sons, Ltd.

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References

1993Discretion versus policy rules in practice 1997Postwar U.S. Business Cycles: An Empirical Investigation 1972Expectations and the neutrality of money 1990Forecasting, Structural Time Series Models and the Kalman Filter 1981A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the ‘business cycle’1993Detrending, stylized facts and the business cycle 2002The Unreliability of Output-Gap Estimates in Real Time 1986Univariate detrending methods with stochastic trends

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2006Forecasting with Unobserved Components Time Series Models 2011Optimal policy in Markov-switching rational expectations models 2010Real Time Estimates of the Euro Area Output Gap: Reliability and Forecasting Performance 2009Structural Time Series Models for Business Cycle Analysis 2006Optimal Monetary Policy in Markov-Switching Models with Rational Expectations Agents

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