The Unreliability of Output-Gap Estimates in Real Time. This note is intended to be read in conjunction with the brief The Tools of Macroeconomic Policy—a Short Primer, which explains many of the economic terms used here. The data on gross fixed capital formation, however, are not available. For estimating the output gap in real time we estimated all the five models for every vintage of data available up to a particular year and then constructed a new series of output gap. Middle East and Central Asia Department,; International Monetary Fund. This linear trend model was later replaced with the linear breaking trend model. Moreover, the position in the business cycle affects the impact of fiscal policy on output: on average, government spending, and revenue multipliers tend to be larger in downturns than in expansions.
As results from the quadratic trend method are more consistent with the historical facts, therefore, we explain the decomposition based on the output gap estimates found with quadratic trend in more detail. Reserve Bank of New Zealand. Fiscal policy, while providing counter-cyclical support in 2009, has been largely pro-cyclical in the past. Third, assuming that output gap is autoregressive process, one period ahead forecast may be upward biased in recession and downward biased in boom. This paper quantifies the short-term impact of fiscal policy on economic activity in Bulgaria using econometric and model-based approaches.
The difference gives a measure of the discretional balance, which represents a medium-term indicator of the state of the public accounts. The Indian equity market trading flat on Friday morning amid positive global cues. For instance, the real-time estimates of the output gap show that the recovery of economic activity started after 1977 but the final estimates show that the economy remained in recession till 1979 and recovery started after that period. The diagonal elements at the end of each column represent the provisional data or first release or preliminary data. Some methods are flexible enough that they underestimate the severity of business cycles while others are so trend dominated that their estimates are subject to end sample bias. For example, all else being equal, lower interest rates tend to raise equity prices as investors discount the future cash flows associated with equity investments at a lower rate. Contrary to most of the empirical findings, Crushore and Evans 2006 concluded that the data revision is insignificant for measure of monetary policy shocks, but in simultaneous equation system it is difficult to identify in the presence of data revision.
But the danger in output gap is that potential output and its growth rates for the Indian economy have been debatable. Only in the linear trend model, the data revision of the output gap has the persistence coefficient of 0. Our findings are based on using new information criteria whose econometric properties allow us to pick for both methods the impulse responses that are valid and relevant for prediction. Each method has its own merits and demerits. The estimated output gap from final data is the one that is usually used in the research on monetary policy.
Second, there are different methods of estimating potential output which may give different estimates. The dataset covers four types of rules: budget balance rules, debt rules, expenditure rules, and revenue rules, applying to the central or general government or the public sector. Fiscal policy, while providing counter-cyclical support in 2009, has been largely pro-cyclical in the past. In this paper, we show that using both structural and reduced form estimates simultaneously can lead to more accurate policy predictions. Despite improvement in structural modelling of the economy, these estimation methodologies are still popular in the macroeconomics literature.
This is because the correlation ignores the differences in means of the two series. In the production function method a specific production function is supposed to capture true production technology in the economy. Professional forecasters update their information sets more frequently than households. Journal of Econometrics 105: November , 111-130. Journal of Monetary Economics, Elsevier 53:6, 1135-1160. The results indicate that all revision series are highly persistent, though it differs across different methods. Our results show that fiscal multipliers differ across countries, calling for a tailored use of fiscal policy.
The paper uses these results to estimate a New Keynesian Phillips curve for Armenia, suggesting a significant role of the output gap and inflation expectations in determining current inflation. During the time period 1974-1977, the results show that the economy is in recession and reached the trough in 1977. If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. However, even though the corporate tax reform had a significant effect on ownership concentration and on the power of the top-institutional blockholders, the change in the corporate income tax law did not revolutionise German corporate governance. This contrasts the findings for professional experts, which seem to be more inclined to incorporate the implications of monetary union for the convergence in inflation rates into their expectations.
Another smoothing approach is the Band-pass filter. In Band-pass filter, as opposed to Hodrick and Prescott filter, we can make use of historical experience with regards to duration of the business cycle. Corrections All material on this site has been provided by the respective publishers and authors. Claus, Iris 2000 Is the Output Gap a Useful Indicator of Inflation? Similar procedure has been adopted for the variable, Gross Fixed Capital Formation. Orphanides and VanNorden 2002 explained different phases of the output gap revisions and found that the deviations between the real time estimates of the output gap and final the output gap are on average about 2.