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Measuring the Natural Output Gap using Actual and Expected Output Data

Kevin Lee, Anthony Garratt and Kalvinder Shields

No 09/21, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: An output gap measure is suggested based on the Beveridge-Nelson decomposition of output using a vector-autoregressive model that includes data on actual output and on expected output obtained from surveys. The paper explains the advantages of using survey data in business cycle analysis and the gap is provided economic meaning by relating it to the natural level of output defined in Dynamic Stochastic General Equilibrium models. The measure is applied to quarterly US data over the period 1970q1-2007q4 and the resultant gap estimates are shown to have sensible statistical properties and perform well in explaining inflation in estimates of New Keynesian Phillips curves.

Keywords: Trend Output; Natural Output Level; Output Gap; Beveridge-Nelson Decomposition; Survey-based Expectations; New Keynesian Phillips Curve (search for similar items in EconPapers)
JEL-codes: C32 D84 E32 (search for similar items in EconPapers)
Date: 2009-10
New Economics Papers: this item is included in nep-cba and nep-mac
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https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp09-21.pdf (application/pdf)

Related works:
Working Paper: Measuring the Natural Output Gap Using Actual and Expected Output Data (2010) Downloads
Working Paper: Measuring the Natural Output Gap using Actual and Expected Output Data (2009) Downloads
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