Reliable real-time output gap estimates based on a modified Hamilton filter

  • We propose a simple modification of the time series filter by Hamilton (2018) that yields reliable and economically meaningful real-time output gap estimates. The original filter relies on 8-quarter-ahead forecast errors of a simple autoregression of log real GDP. While this approach yields a cyclical component of GDP that is hardly revised with new incoming data due to the one-sided filtering approach, it does not cover typical business cycle frequencies evenly, but short business cycles are muted and medium length business cycles are amplified. Further, the estimated trend is as volatile as GDP itself and can thus hardly be interpreted as potential GDP. A simple modification that is based on the mean of 4- to 12-quarter-ahead forecast errors shares the favorable real-time properties of the Hamilton filter, but leads to a much better coverage of typical business cycle frequencies and a smooth estimated trend. Based on output growth and inflation forecasts and a comparison to revised output gap estimates from policy institutions, we find that real-time output gaps based on the modified Hamilton filter are economically much more meaningful measures of the business cycle than those based on other simple statistical trend-cycle decomposition techniques such as the HP or the Bandpass filter.

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Author:Josefine Quast, Maik Hendrik WoltersORCiDGND
Parent Title (English):Working paper series / Institute for Monetary and Financial Stability ; 133
Series (Serial Number):Working paper series / Institute for Monetary and Financial Stability (133)
Publisher:Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2019
Year of first Publication:2019
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2019/04/30
Tag:Hamilton filter; inflation forecasting; output gap; potential output; real-time data; trend-cycle decomposition
Issue:March 26, 2019
Page Number:27
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
Licence (German):License LogoDeutsches Urheberrecht