Estimating the output gap in real time: A factor model approach

Knut Are Aastveit and Tørres G. Trovik
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Tørres G. Trovik: Norges Bank (Central Bank of Norway)and The World Bank

No 2008/23, Working Paper from Norges Bank

Abstract: An approximate dynamic factor model can substantially improve the reliability of real time output gap estimates. The model extracts a common component from macroeconomic indicators, which reduces errors in the gap due to data revisions. The model's ability to handle the unbalanced arrival of data, also yields favorable nowcasting properties and thus starting conditions for the filtering of data into trend and deviations from trend. Combined with the method of augmenting data with forecasts prior to filtering, this greatly reduces the end-of-sample imprecision in the gap estimate. The increased precision has economic significance for real time policy decisions.

Keywords: Output gap; Real time analysis; Monetary policy; Forecasting; Factor model (search for similar items in EconPapers)
JEL-codes: C33 C53 E52 E58 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2008-12-12
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-for and nep-mac
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://www.norges-bank.no/en/news-events/news-pub ... pers/2008/WP-200823/

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Journal Article: Estimating the output gap in real time: A factor model approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2008_23

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