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

Knut Are Aastveit and Tørres Trovik

The Quarterly Review of Economics and Finance, 2014, vol. 54, issue 2, 180-193

Abstract: By using a dynamic factor model, we can substantially improve the reliability of real-time output gap estimates for the U.S. economy. First, we use a factor model to extract a series for the common component in GDP from a large panel of monthly real-time macroeconomic variables. This series is immune to revisions to the extent that revisions are due to unbiased measurement errors or idiosyncratic news. Second, our model is able to handle the unbalanced arrival of the data. This yields favorable nowcasting properties and thus starting conditions for the filtering of data into a trend and deviations from a 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 importance for real-time policy decisions and improves real-time inflation forecasts.

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)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Estimating the output gap in real time: A factor model approach (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:54:y:2014:i:2:p:180-193

DOI: 10.1016/j.qref.2013.09.003

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