Estimating the Output Gap After COVID- An Application to Colombia

Camilo Granados and Daniel Parra-Amado

No 04-2023, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: This study examines whether and how important it is to adjust output gap frameworks during the COVID-19 pandemic and similar unprecedentedly large-scale episodes. Our proposed modelling framework comprises a Bayesian Structural Vector Autoregresion with an identification setup based on a permanent-transitory decomposition that exploits the long-run relationship of consumption with output whose residuals are scaled up around the COVID-19 period. Our results indicate that (i) a single structural error is sufficient to explain the permanent component of the gross domestic product (GDP); (ii) the adjusted method allows for the incorporation of the COVID-19 period without assuming sudden changes in the modelling setup after the pandemic; and (iii) the proposed adjustment generates approximation improvements relative to standard filters or similar models with no adjustments or alternative ones, but where the specific rare observations are not known. Importantly, abstracting from any adjustment may lead to over- or underestimating the gap, too-quick gap recoveries after downturns, or too-large volatility around the median potential output estimations.

Keywords: Bayesian methods; Business cycles; Potential output; Output gaps; Structural estimation (search for similar items in EconPapers)
JEL-codes: E2 E3 E32 O41 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2023-03-13
References: Add references at CitEc
Citations:

Downloads: (external link)
http://repec.graduateinstitute.ch/pdfs/Working_papers/HEIDWP04-2023.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gii:giihei:heidwp04-2023

Access Statistics for this paper

More papers in IHEID Working Papers from Economics Section, The Graduate Institute of International Studies Contact information at EDIRC.
Bibliographic data for series maintained by Dorina Dobre ().