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Forecasting output gaps in the G-7 countries: The role of correlated Innovations and structural breaks

Mardi Dungey (), Jan Jacobs () and Jing Tian ()
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Jing Tian: Tasmanian School of Business & Economics, University of Tasmania,

No 2016-04, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: Trend GDP and output gaps play an important role in fiscal and monetary policy formulation, often including the need for forecasts. In this paper we focus on fore- casting trend GDP and output gaps with Beveridge-Nelson (1981) trend-cycle decompositions and investigate how these are affected by assumptions concern- ing correlated innovations and structural breaks. We evaluate expanding win- dows, one-step-ahead forecasts indirectly for the G-7 countries on the basis of real GDP growth rate forecasts. We find that correlated innovations affect real GDP growth rate forecasts positively, while allowing for structural breaks works for some countries but not for all. In the face of uncertainty the evidence supports that in making forecasts of trends and output gap policy makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks.

Keywords: trend; output gap; trend-cycle decomposition; real GDP; forecasts; structural break (search for similar items in EconPapers)
JEL-codes: C22 C53 C82 (search for similar items in EconPapers)
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Date: 2016
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Published by the University of Tasmania. Discussion paper 2016-04

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