Measuring the Output Gap Using Stochastic Model Specification Search

34 Pages Posted: 13 Jan 2017

See all articles by Joshua C. C. Chan

Joshua C. C. Chan

University of Technology Sydney (UTS) - UTS Business School; Purdue University

Angelia Grant

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: January 11, 2017

Abstract

It is well known that different specification choices can give starkly different output gap estimates. To account for model uncertainty, we average estimates over a wide variety of popular specifications using stochastic model specification search. In particular, we consider three types of specification choices: sets of variables used in the analysis, output trend specifications and distributional assumptions. Using US data, we find that the unemployment gap is useful in estimating the output gap, but conditional on the unemployment gap, the inflation gap no longer depends on the output gap. Our results show a steady decline in trend output growth throughout the sample, and the estimate at the end of our sample is only about 1%. Moreover, data favor t over Gaussian distributed innovations, suggesting the relatively frequent occurrence of extreme events.

Keywords: Model Averaging, Trend Inflation, Potential Output, NAIRU, Okun's Law, Phillips Curve

JEL Classification: C11, C52, E32

Suggested Citation

Chan, Joshua C. C. and Chan, Joshua C. C. and Grant, Angelia, Measuring the Output Gap Using Stochastic Model Specification Search (January 11, 2017). CAMA Working Paper No. 2/2017 , Available at SSRN: https://ssrn.com/abstract=2897988 or http://dx.doi.org/10.2139/ssrn.2897988

Joshua C. C. Chan (Contact Author)

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

Purdue University

West Lafayette, IN 47907-1310
United States

Angelia Grant

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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