Do so-called multivariate filters have better revision properties? An empirical analysis

The output gap plays a crucial role in thinking and actions of many central banks but real time measurements undergo substantial revisions as more data become available (Orphanides (2001), Orphanides and van Norden (forthcoming)). Some central banks augment, such as the Bank of Canada and the Reserve Bank of New Zealand, the Hodrick and Prescott (1997) filter with conditioning structural information to mitigate the impact of revisions to the output gap estimates. In this paper, we use a state space Kalman filter framework to examine whether the augmented (so-called “multivariate filtersâ€) achieve this objective. We find that the multivariate filters are no better than the Hodrick-Prescott filter for real-time NZ data. The addition of structural equations increase the number of signal equations, but at the same time adds more unobserved trend/equilibrium variables to the system. We find that how these additional trends/equilibrium values are treated matters a lot, and they increase the uncertainty around the estimates. In addition, the revisions from these models can be as large as a univariate Hodrick-Prescott filter.output gap, real time, multivariate filters

Does a stitch in time save nine?

In December 2000, the Reserve Bank issued a discussion paper entitled "Interest rate smoothing in New Zealand and other dollar bloc countries," written by Aaron Drew and L Christopher Plantier. The key points made are summarised in this paper.

Interest rate smoothing in New Zealand and other dollar bloc countries

This paper utilises the partial adjustment approach of Judd and Rudebusch (1998) to empirically estimate the degree of short-term interest rate smoothing by central banks in the dollar block countries. All countries appear to smooth short-term interest rates significantly, with New Zealand and Canada smoothing rates by less than what appears to be the case for Australia and the United States. We then examine the macroeconomic implications of interest rate smoothing using the Reserve Bank of New Zealand's macro model. The model is constructed such that the more interest rates are smoothed in the short-term, the larger inflation and output variability will be over the cycle. However, at least over the narrow range of the empirically based smoothing approaches, the results suggest that there may be little cost in smoothing short-term interest rates in New Zealand to the degree seen in Australia or the United States.

Estimating a Taylor Rule for New Zealand with a time-varying neutral real rate

Many critics of the Taylor rule claim that it is inferior to inflation forecast based (IFB) rules because it is not forward-looking, is not aggressive enough, and because of uncertainty surrounding the output gap. Nevertheless, the Taylor rule serves a constructive purpose because it abstracts from the Bank's macroeconomic model, FPS, and its performance is robust across various economic models. The Taylor rule thus provides a useful cross-check to the IFB rule, whose recommendations necessarily rely on a particular model structure, its dynamics and specific judgements over the forecast horizon. Additionally, this paper contends that any interest rate rule or model must account for the fall in the ex-ante real interest rate and the non-stationarity of short-term rates in New Zealand. We show how the neutral real interest rate (NRR) in the Taylor rule drifts downward since the second quarter of 1988, and explain why this presents additional real-time difficulties for the Taylor rule.