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

Travis Berge

No 2020-012r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: A factor stochastic volatility model estimates the common component to estimates of the output gap produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. Output gap estimates are very uncertain, even well after the fact, especially at business cycle turning points. However, the common component of the output gap estimates is clearly procyclical, and innovations to the common factor produce persistent positive effects on economic activity. Output gaps estimated by the Congressional Budget Office have very similar properties. Increased macroeconomic uncertainty, as measured by the common factor's volatility, leads to persistent negative responses in economic variables.

Keywords: Output gap estimation; Unobserved variables; Real-time data; Factor model; Stochastic volatility; Macroeconomic uncertainty (search for similar items in EconPapers)
JEL-codes: C53 E32 (search for similar items in EconPapers)
Pages: 58 p.
Date: 2020-02-03, Revised 2021-04-14
New Economics Papers: this item is included in nep-ets, nep-for, nep-mac and nep-ore
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https://www.federalreserve.gov/econres/feds/files/2020012r1pap.pdf (application/pdf)

Related works:
Journal Article: Time-Varying Uncertainty of the Federal Reserve's Output Gap Estimate (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-12

DOI: 10.17016/FEDS.2020.012r1

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