Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter

Review of Economics and Statistics, 2018, issue 100, number 3, pg. 550-566

45 Pages Posted: 12 Aug 2019

See all articles by Güneş Kamber

Güneş Kamber

Bank for International Settlements (BIS) - Monetary and Economic Department

James Morley

University of Sydney

Benjamin Wong

Monash University - Department of Econometrics & Business Statistics

Multiple version iconThere are 4 versions of this paper

Date Written: March 14, 2017

Abstract

The Beveridge-Nelson decomposition based on autoregressive models produces estimates of the output gap that are strongly at odds with widely-held beliefs about transitory movements in economic activity. This is due to parameter estimates implying a high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall forecast error variance. When we impose a lower signal-to-noise ratio, the resulting Beveridge-Nelson filter produces a more intuitive estimate
of the output gap that is large in amplitude, highly persistent, and typically increases in expansions and decreases in recessions. Notably, our approach is also reliable in the sense of being subject to smaller revisions and predicting future output growth and inflation better than other trend-cycle decompositions that impose a low signal-to-noise ratio.

Keywords: Beveridge-Nelson decomposition, output gap, signal-to-noise ratio

JEL Classification: C18, E17, E32

Suggested Citation

Kamber, Gunes and Morley, James and Wong, Benjamin, Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter (March 14, 2017). Review of Economics and Statistics, 2018, issue 100, number 3, pg. 550-566. Available at SSRN: https://ssrn.com/abstract=3434174

Gunes Kamber

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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

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