Measuring the Output Gap Using Large Datasets
62 Pages Posted: 8 Aug 2018 Last revised: 3 Dec 2020
Date Written: December 2, 2020
We propose a new measure of the output gap based on a dynamic factor model that is estimated on a large number of U.S. macroeconomic indicators and which incorporates relevant stylized facts about macroeconomic data (co-movements, non-stationarity, and the slow drift in long-run output growth over time). We find that, (1) from the mid-1990s to 2008, the U.S. economy operated above its potential; and, (2) in 2018:Q4, the labor market was tighter than the market for goods and services. Because it is mainly data driven, our measure is a natural complementary tool to the theoretical models used at policy institutions.
Keywords: Output Gap; Non-stationary Approximate Dynamic Factor Model; Trend-Cycle Decomposition
JEL Classification: C32, C38, C55, E0
Suggested Citation: Suggested Citation