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FAQ: How do I extract the output gap?

Fabio Canova
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Fabio Canova: Norwegian Business School, CAMP and CEPR

No 386, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: I study potentials and gaps, permanent and transitory fluctuations in macroeconomic variables using the Smets and Wouter (2007) model. Model-based gaps display low frequency variations; possess more than business cycle fluctuations; have similar frequency representation as potentials, and are correlated with them. Permanent and transitory fluctuations display similar features, but are uncorrelated. I use a number of filters to extract trends and cycles using simulated data. Gaps are best approximated with a polynomial filter; transitory fluctuations with a differencing approach, but distortions are large. Explanations for the results are given. I propose a filter which reduces the biases of existing procedures.

Keywords: Gaps and potentials; permanent and transitory components; filtering; cyclical fluctuations; gain functions (search for similar items in EconPapers)
JEL-codes: C31 E27 E32 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2020-01-01
New Economics Papers: this item is included in nep-ets and nep-mac
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