FAQ: how do I extract the output gap?

Fabio Canova

I study potentials and gaps, permanent and transitory fluctuations in macroeconomic variables using the Smets and Wouter (2007) model. Model-based gaps display low frequency variations; possess more than business cycle fluctuations; have similar frequency representation as potentials, and are correlated with them. Permanent and transitory fluctuations display similar features, but are uncorrelated. I use a number of filters to extract trends and cycles using simulated data. Gaps are best approximated with a polynomial filter; transitory fluctuations with a differencing approach, but distortions are large. Explanations for the results are given. I propose a filter which reduces the biases of existing procedures.

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Year of publication:	January 2020
Authors:	Canova, Fabio
Publisher:	Stockholm : Sveriges Riksbank
Subject:	Gaps and potentials \| permanent and transitory components \| filtering \| cyclical fluctuations \| gain functions \| Zeitreihenanalyse \| Time series analysis \| Konjunktur \| Business cycle \| Produktionspotenzial \| Potential output \| Bruttoinlandsprodukt \| Gross domestic product \| Theorie \| Theory \| Zustandsraummodell \| State space model