Measuring the Output Gap Using Large Datasets

Abstract

We decompose US aggregate output into potential output and the output gap by means of a non-stationary dynamic factor model estimated on a large dataset of macroeconomic indicators, combined with a non-parametric trend-cycle decomposition of the factors. We find that: (1) from the mid-90s to 2008 the US economy operated above its potential; (2) as of 2018:Q4 the labor market was tighter than the goods and services market; and (3) our output gap measure revises modestly in real-time. Due to its purely data driven nature, our measure is a natural complementary tool to the theoretical models used in policy institutions.

Keywords: Output Gap; Non-stationary Approximate Dynamic Factor Model; Trend-Cycle Decomposition

JEL Classification: C32, C38, C55, E0