Visualizing the invisible: estimating the New Keynesian output gap via a Bayesian approach
As both the natural level of output and the New Keynesian output gapare unobserved, there is quite some debate on the question how these variableslook like in practice. Rather than taking the standard approach of using a timetrend or the HP-filter to obtain estimates of these two objects, this paper takesa theoretically more sound route by separating trend from cycle via Bayesianestimation of a New Keynesian model, augmented with an unobserved com-ponents model for output. This delivers us with model consistent estimates ofboth the natural level of output and the New Keynesian output gap. Theseestimates are then compared with the dominant output gap proxies used in theliterature. It turns out that the benefits of using the model-based approachtaken in this paper mainly emerge in real time, thereby making this methodpotentially useful for the conduct of monetary policy.Key words: Bayesian estimation; unobserved components model; New Key-nesian model; output gap; New Keynesian Phillips curveJEL-classifications: C53, E32, E37, E52
Year of publication: |
2009
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Authors: | Willems, T. |
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