Discussion Paper Details

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Title: FAQ: How do I measure the Output gap?

Author(s): Fabio Canova

Publication Date: June 2020

Keyword(s): Cyclical fluctuations, Filtering, gain functions, Gaps and potentials and permanent and transitory components

Programme Area(s): Monetary Economics and Fluctuations

Abstract: I investigate the properties of potentials and gaps, of permanent and transitory fluctuations using a variety of DSGE models. Model-based gaps display low frequency variations; have similar frequency representation as potentials, and are correlated with them. These features depend on the properties of the disturbances but not on frictions or modeling principles. Permanent and transitory fluctuations display similar features, but are uncorrelated. I use a number of filters to extract trends and cycles from simulated data. Distortions are large. Gaps are best approximated with a polynomial filter; transitory fluctuations with a differencing approach. I design a filter which reduces the biases of existing filters.

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Bibliographic Reference

Canova, F. 2020. 'FAQ: How do I measure the Output gap?'. London, Centre for Economic Policy Research.