The Reliability of Output Gap Estimates in Real Time

45 Pages Posted: 9 Aug 1999

See all articles by Athanasios Orphanides

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Simon van Norden

HEC Montreal - Department of Finance; CIRANO; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: July 1999

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.

JEL Classification: E3, E5, C2

Suggested Citation

Orphanides, Athanasios and van Norden, Simon, The Reliability of Output Gap Estimates in Real Time (July 1999). Available at SSRN: https://ssrn.com/abstract=171795 or http://dx.doi.org/10.2139/ssrn.171795

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA
Malaysia

Simon Van Norden (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6781 (Phone)
514-340-5632 (Fax)

HOME PAGE: http://svannorden.org

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

HOME PAGE: http://svannorden.org

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
345
Abstract Views
1,837
rank
109,120
PlumX Metrics