DP17111 Monitoring the Economy in Real Time: Trends and Gaps in Real Activity and Prices

Author(s): Thomas Hasenzagl, Filippo Pellegrino, Lucrezia Reichlin, Giovanni Ricco
Publication Date: March 2022
Keyword(s): Bayesian estimation, Output gap, Phillips curve, Real-time forecasting, semi-structural models
JEL(s): C11, C32, C53, E31, E32, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17111

A mixed-frequency semi-structural model is used for estimating unobservable quantities such as the output gap, the Phillips curve and the NAIRU in real time. We consider two specifications: in one the output gap is observed as the official CBO measure, in the other is unobserved and derived via minimal theory-based restrictions. We find that the CBO model implies a smoother trend output but the second model better captures the business cycle dynamics of nominal and real variables. The methodology offers both a framework for evaluating official estimates of unobserved quantities of economic interest and tracking them in real time.