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Working Paper
Which Output Gap Estimates Are Stable in Real Time and Why?
Output gaps that are estimated in real time can differ substantially from those estimated after the fact. We aim to understand the real-time instability of output gap estimates by comparing a suite of reduced-form models. We propose a new statistical decomposition and find that including a Okun’s law relationship improves real-time stability by alleviating the end-point problem. Models that include the unemployment rate also produce output gaps with relevant economic content. However, we find that no model of the output gap is clearly superior to the others along each metric we consider.
Discussion Paper
Estimating the output gap in real time
I propose a novel method of estimating the potential level of U.S. GDP in real time. The proposed wage-based measure of economic potential remains virtually unchanged when new data are released. The distance between current and potential output ? the output gap ? satisfies Okun?s law and outperforms many other measures of slack in forecasting inflation. Thus, I provide a robust statistical tool useful for understanding current economic conditions and guiding policymaking.
Working Paper
Time-varying Uncertainty of the Federal Reserve’s Output Gap Estimate
What is the output gap and when do we know it? A factor stochastic volatility model estimates the common component to forecasts of the output gap produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. The common factor to these forecasts is highly procyclical, and unexpected increases to the common factor are associated with persistent responses in other macroeconomic variables. However, output gap estimates are very uncertain, even well after the fact. Output gap uncertainty increases around business cycle turning ...
Working Paper
Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy
We estimate the natural rate of interest (r*) using a semi-structural model of the U.S. economy that jointly characterizes the trend and cyclical factors of key macroeconomic variables such as output, the unemployment rate, inflation, and short- and long-term interest rates. We specify a monetary policy rule and an equation that characterizes the 10-year Treasury yield to exploit the information provided by both interest rates to infer r*. However, the use of a monetary policy rule with a sample that spans the Great Recession and its aftermath poses a challenge because of the effective lower ...
Working Paper
An Output Gap Measure for the Euro Area : Exploiting Country-Level and Cross-Sectional Data Heterogeneity
This paper proposes a methodology to estimate the euro-area output gap by taking advantage of two types of data heterogeneity. On the one hand, the method uses information on real GDP, inflation, and the unemployment rate for each member state; on the other hand, it jointly considers this information for all the euro-area countries to extract an area-wide output gap measure. The setup is an unobserved components model that theorizes a common cycle across euro-area economies in addition to country-specific cyclical components. I estimate the model with Bayesian methods using data for the 19 ...