Time-varying Uncertainty of the Federal Reserve’s Output Gap Estimate

48 Pages Posted: 14 May 2020

See all articles by Travis J. Berge

Travis J. Berge

Board of Governors of the Federal Reserve System

Date Written: February 3, 2020

Abstract

What is the output gap and when do we know it? A factor stochastic volatility model estimates the common component to forecasts of the output gap produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. The common factor to these forecasts is highly procyclical, and unexpected increases to the common factor are associated with persistent responses in other macroeconomic variables. However, output gap estimates are very uncertain, even well after the fact. Output gap uncertainty increases around business cycle turning points. Lastly, increased macroeconomic uncertainty, as measured by the output gap's time-varying volatility, produces pronounced negative responses to other macroeconomic variables.

Keywords: Output gap; Unobserved variables; Real-time data; Factor model; Stochastic volatility; Macroeconomic uncertainty

JEL Classification: C53; E32

Suggested Citation

Berge, Travis J., Time-varying Uncertainty of the Federal Reserve’s Output Gap Estimate (February 3, 2020). FEDS Working Paper No. 2020-012 https://doi.org/10.17016/FEDS.2020.012 , Available at SSRN: https://ssrn.com/abstract=3600417

Travis J. Berge (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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