Intuitive and reliable estimates of the output gap from a Beveridge-Nelson filter

Günes Kamber, James Morley, Benjamin Wong

Research output: Contribution to journalArticleResearchpeer-review

Abstract

The Beveridge-Nelson decomposition based on autoregressive models produces estimates of the output gap that are strongly at odds with widely held beliefs about transitory movements in economic activity. This is due to parameter estimates implying a high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall forecast error variance. When we impose a lower signal-to-noise ratio, the resulting Beveridge-Nelson filter produces a more intuitive estimate of the output gap that is large in amplitude and highly persistent, and it typically increases in expansions and decreases in recessions. Notably, our approach is also reliable in the sense of being subject to smaller revisions and predicting future output growth and inflation better than other trend-cycle decompositions that impose a low signal-to-noise ratio.

Original languageEnglish
Pages (from-to)550-566
Number of pages17
JournalReview of Economics and Statistics
Volume100
Issue number3
DOIs
Publication statusPublished - 1 Jul 2018

Cite this

@article{f2d7cc9b2b1c4b4995056786f8f129a0,
title = "Intuitive and reliable estimates of the output gap from a Beveridge-Nelson filter",
abstract = "The Beveridge-Nelson decomposition based on autoregressive models produces estimates of the output gap that are strongly at odds with widely held beliefs about transitory movements in economic activity. This is due to parameter estimates implying a high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall forecast error variance. When we impose a lower signal-to-noise ratio, the resulting Beveridge-Nelson filter produces a more intuitive estimate of the output gap that is large in amplitude and highly persistent, and it typically increases in expansions and decreases in recessions. Notably, our approach is also reliable in the sense of being subject to smaller revisions and predicting future output growth and inflation better than other trend-cycle decompositions that impose a low signal-to-noise ratio.",
author = "G{\"u}nes Kamber and James Morley and Benjamin Wong",
year = "2018",
month = "7",
day = "1",
doi = "10.1162/rest_a_00691",
language = "English",
volume = "100",
pages = "550--566",
journal = "Review of Economics and Statistics",
issn = "0034-6535",
publisher = "Massachusetts Institute of Technology Press",
number = "3",

}

Intuitive and reliable estimates of the output gap from a Beveridge-Nelson filter. / Kamber, Günes; Morley, James; Wong, Benjamin.

In: Review of Economics and Statistics, Vol. 100, No. 3, 01.07.2018, p. 550-566.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Intuitive and reliable estimates of the output gap from a Beveridge-Nelson filter

AU - Kamber, Günes

AU - Morley, James

AU - Wong, Benjamin

PY - 2018/7/1

Y1 - 2018/7/1

N2 - The Beveridge-Nelson decomposition based on autoregressive models produces estimates of the output gap that are strongly at odds with widely held beliefs about transitory movements in economic activity. This is due to parameter estimates implying a high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall forecast error variance. When we impose a lower signal-to-noise ratio, the resulting Beveridge-Nelson filter produces a more intuitive estimate of the output gap that is large in amplitude and highly persistent, and it typically increases in expansions and decreases in recessions. Notably, our approach is also reliable in the sense of being subject to smaller revisions and predicting future output growth and inflation better than other trend-cycle decompositions that impose a low signal-to-noise ratio.

AB - The Beveridge-Nelson decomposition based on autoregressive models produces estimates of the output gap that are strongly at odds with widely held beliefs about transitory movements in economic activity. This is due to parameter estimates implying a high signal-to-noise ratio in terms of the variance of trend shocks as a fraction of the overall forecast error variance. When we impose a lower signal-to-noise ratio, the resulting Beveridge-Nelson filter produces a more intuitive estimate of the output gap that is large in amplitude and highly persistent, and it typically increases in expansions and decreases in recessions. Notably, our approach is also reliable in the sense of being subject to smaller revisions and predicting future output growth and inflation better than other trend-cycle decompositions that impose a low signal-to-noise ratio.

UR - http://www.scopus.com/inward/record.url?scp=85049801875&partnerID=8YFLogxK

U2 - 10.1162/rest_a_00691

DO - 10.1162/rest_a_00691

M3 - Article

VL - 100

SP - 550

EP - 566

JO - Review of Economics and Statistics

JF - Review of Economics and Statistics

SN - 0034-6535

IS - 3

ER -