Measuring the Output Gap using Large Datasets

Matteo Barigozzi and Matteo Luciani
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Matteo Luciani: Federal Reserve Board

The Review of Economics and Statistics, 2023, vol. 105, issue 6, 1500-1514

Abstract: We propose a new measure of the output gap based on a dynamic factor model that is estimated on a large number of U.S. macroeconomic indicators and which incorporates relevant stylized facts about macroeconomic data (comovements, nonstationarity, and the slow drift in long-run output growth over time). We find that (1) from the mid-1990s to 2008, the U.S. economy operated above its potential and (2) in 2018:Q4, the labor market was tighter than the market for goods and services. Because it is mainly data-driven, our measure is a natural complementary tool to the theoretical models used at policy institutions.

Date: 2023
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