Visualizing the Invisible: Estimating the New Keynesian Output Gap via a Bayesian Approach

Tinbergen Institute Discussion Paper 09-074/2

34 Pages Posted: 23 Aug 2009 Last revised: 14 Feb 2011

See all articles by Tim Willems

Tim Willems

University of Oxford - Nuffield Department of Medicine

Date Written: March 26, 2010

Abstract

As the New Keynesian output gap cannot be observed, there is quite some debate on the question what this variable looks like. Rather than taking the standard approach of using a time trend or the HP-filter to estimate it, this paper separates trend from cycle via Bayesian estimation of a New Keynesian model, augmented with an unobserved components model for output. This provides us with a model consistent estimate of the output gap. This estimate is compared to popular proxies used in the literature. It turns out that the benefits of using the model-based approach mainly lie in real time.

Keywords: Bayesian estimation, unobserved components model, New Keynesian model, output gap, New Keynesian Phillips curve

JEL Classification: C53, E32, E37, E52

Suggested Citation

Willems, Tim, Visualizing the Invisible: Estimating the New Keynesian Output Gap via a Bayesian Approach (March 26, 2010). Tinbergen Institute Discussion Paper 09-074/2, Available at SSRN: https://ssrn.com/abstract=1458923 or http://dx.doi.org/10.2139/ssrn.1458923

Tim Willems (Contact Author)

University of Oxford - Nuffield Department of Medicine ( email )

New Road
Oxford, OX1 1NF
United Kingdom

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