Estimating and Accounting for the Output Gap with Large Bayesian Vector Autoregressions

43 Pages Posted: 21 Jul 2017

See all articles by James Morley

James Morley

University of Sydney

Benjamin Wong

Monash University - Department of Econometrics & Business Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 2017

Abstract

We demonstrate how Bayesian shrinkage can address problems with utilizing large information sets to calculate trend and cycle via a multivariate Beveridge-Nelson (BN) decomposition. We illustrate our approach by estimating the U.S. output gap with large Bayesian vector autoregressions that include up to 138 variables. Because the BN trend and cycle are linear functions of historical forecast errors, we are also able to account for the estimated output gap in terms of different sources of information, as well as particular underlying structural shocks given identification restrictions. Our empirical analysis suggests that, in addition to output growth, the unemployment rate, CPI inflation, and, to a lesser extent, housing starts, consumption, stock prices, real M1, and the federal funds rate are important conditioning variables for estimating the U.S. output gap, with estimates largely robust to incorporating additional variables. Using standard identification restrictions, we find that the role of monetary policy shocks in driving the output gap is small, while oil price shocks explain about 10% of the variance over different horizons.

Keywords: Beveridge-Nelson decomposition, output gap, Bayesian estimation, multivariate information

JEL Classification: C18, E17, E32

Suggested Citation

Morley, James and Wong, Benjamin, Estimating and Accounting for the Output Gap with Large Bayesian Vector Autoregressions (July 19, 2017). CAMA Working Paper No. 46/2017. Available at SSRN: https://ssrn.com/abstract=3005741 or http://dx.doi.org/10.2139/ssrn.3005741

James Morley

University of Sydney ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

Benjamin Wong (Contact Author)

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
62
Abstract Views
453
rank
332,458
PlumX Metrics