Working Paper

News, noise, and estimates of the \"true\" unobserved state of the economy

Abstract: Which provides a better estimate of the \"true\" state of the U.S. economy, gross domestic product (GDP) or gross domestic income (GDI)? Past work has assumed the difference between each estimate and the \"true\" state of the economy is pure noise, taking greater variability to imply lower reliability. We posit instead that each difference may be pure news; then greater variability implies higher information content and greater reliability. This is a general point, applicable to numerous situations beyond the case of combining GDP and GDI. For that particular case, we analyze various vintages of estimates, developing models for combining GDP and GDI under the differing assumptions, and use revisions to show the news assumption is probably more accurate.

Keywords: Gross domestic product; National income;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2007

Number: 2007-34