Keywords: Real-time data, output gap, business cycle measurement
Abstract: Compared to its central role in policy discussions in the United States
and most other developed countries, the reliability of the measurement
of the output gap has attracted relatively little academic study.
Furthermore, both the academic literature and the debate among
practitioners have tended to neglect a key factor. Although in a policy
setting it is necessary to estimate the current (i.e. end-of-sample)
output gap without the benefit of knowing the future, most studies
concentrate on measurement that employs data that only become available
later. In this paper we examine the reliability of alternative output
detrending methods, with special attention to the accuracy of real-time
estimates. We show that ex post revisions of the output gap are of the
same order of magnitude as the output gap itself, that these ex post
revisions are highly persistent and that real-time estimates tend to be
severely biased around business cycle turning points, when the cost of
policy induced errors due to incorrect measurement is at its greatest.
We investigate the reasons for these ex post revisions, and find that,
although important, the ex post revision of published data is not the
primary source of revisions in output gap measurements. The bulk of the
problem is due to the pervasive unreliability of end-of-sample estimates
of the trend in output.
Full paper (297 KB PDF)
| Full paper (1014 KB Postscript)
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Last update: September 29, 1999