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Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter

Gunes Kamber, James Morley () and Benjamin Wong

No DP2017/01, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: The Beveridge-Nelson (BN) trend-cycle decomposition based on autoregressive forecasting models of U.S. quarterly real GDP growth produces estimates of the output gap that are strongly at odds with widely-held beliefs about the amplitude, persistence, and even sign of transitory movements in economic activity. These antithetical attributes are related to the autoregressive coefficient estimates implying a very high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall quarterly forecast error variance. When we impose a lower signal-to-noise ratio, the resulting BN decomposition, which we label the "BN filter", produces a more intuitive estimate of the output gap that is large in amplitude, highly persistent, and typically increases in expansions and decreases in recessions. Real-time estimates from the BN filter are also reliable in the sense that they are subject to smaller revisions and predict future output growth and inflation better than estimates from other methods of trend-cycle decomposition that also impose a low signal-to-noise ratio, including deterministic detrending, the Hodrick-Prescott filter, and the bandpass filter.

New Economics Papers: this item is included in nep-ets and nep-mac
Date: 2017-01
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Related works:
Journal Article: Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter (2018) Downloads
Working Paper: Intuitive and reliable estimates of the output gap from a Beveridge-Nelson Filter (2017) Downloads
Working Paper: Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter (2017) Downloads
Working Paper: Intuitive and reliable estimates of the output gap from a Beveridge-Nelson filter (2016) Downloads
Working Paper: Intuitive and Reliable Estimates of the Output Gap from a Beveridge-Nelson Filter (2016) Downloads
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