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.