Significant differences can be found among estimates of the output gaps
estimated in two types of data sets.
where i is the nominal interest rate, n is inflation, y is the output gap
, r* is the neutral real interest rate, and n* is the inflation target.
The third section describes the data and reports dynamic factor model estimation results for national budget surpluses, output gaps
, equity valuation ratios, unexpected inflation, and military spending.
The output gaps
obtained based on the estimated model differ substantially from those calculated with the univariate version of the HP filter.
Using Equation (10), we can investigate how the Federal Reserve responds to inflation and output gaps
in both the short and long run.
Since future interest rates determine future inflation rates and output gaps
, the only terms in the central bank's loss function under its current control give the current loss, 1/2 ([[pi].
The output gap
is the difference between real GDP and potential real GDP expressed as a percentage of potential real GDP.
According to their estimates, the output gaps
have been negative at all times since the middle of the 1990s, so that they might not be successful in illustrating the business cycles and overall macroeconomic conditions.
If the lagged funds rate is important because it is a short-hand way of saying that policy responds to a weighted average of past inflations and past output gaps
, today's funds rate does not depend on yesterday's funds rate, but what policy would have been if the zero lower bound were not present.
A]lthough output gaps
are of course very hard to measure, the weight of the evidence continues to support those who believe that considerable slack remains in the economy.
The impact of uncertainty about business cycle indicators on inflation projections Uncertainty about output gaps
has consequences for the reliability of inflation projections that use estimates of the short-run trade-off between inflation and activity.
After the comparison of estimated figures from standard and extended Kalman filters, it would be helpful to evaluate the uncertainty surrounding the estimated output gaps
for the baseline model across the methods.