The Federal Reserve's output gap: the unreliability of real-time reliability tests

  • Output gap revisions can be large even after many years. Real-time reliability tests might therefore be sensitive to the choice of the final output gap vintage that the real-time estimates are compared to. This is the case for the Federal Reserve’s output gap. When accounting for revisions in response to the global financial crisis in the final output gap, the improvement in real-time reliability since the mid-1990s is much smaller than found by Edge and Rudd (Review of Economics and Statistics, 2016, 98(4), 785-791). The negative bias of real-time estimates from the 1980s has disappeared, but the size of revisions continues to be as large as the output gap itself. The authors systematically analyse how the realtime reliability assessment is affected through varying the final output gap vintage. They find that the largest changes are caused by output gap revisions after recessions. Economists revise their models in response to such events, leading to economically important revisions not only for the most recent years, but reaching back up to two decades. This might improve the understanding of past business cycle dynamics, but decreases the reliability of real-time output gaps ex post.

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Author:Josefine Quast, Maik H. WoltersORCiDGND
Parent Title (German):Working Paper Series : Institute for Monetary and Financial Stability ; 179
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (179)
Publisher:Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2023
Year of first Publication:2023
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2023/01/31
Tag:Business Cycles; Output Gap; Potential Output; Real-Time Data; Revisions
Edition:January 23, 2023
Page Number:19
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C5 Econometric Modeling / C52 Model Evaluation and Selection
E Macroeconomics and Monetary Economics / E3 Prices, Business Fluctuations, and Cycles / E32 Business Fluctuations; Cycles
E Macroeconomics and Monetary Economics / E5 Monetary Policy, Central Banking, and the Supply of Money and Credit / E52 Monetary Policy
Licence (German):License LogoDeutsches Urheberrecht