This paper assesses the statistical reliability of different measures of the output gap for the Euro-11 area and the US using output, inflation and unemployment systems. In order to assess the reliability of an output gap estimate two criteria are adopted. Firstly, the estimate should have forecasting power over inflation. Secondly, the ex post statistical revisions of the output gap should not differ significantly from previously computed measures. As an additional check on reliability, we find out whether the estimate of the output gap is positively correlated with standard measures of capacity utilization. We find that under our multivariate specification, unobservable components (UC) type models of the output gap show temporal consistency between sequential and final estimates and are consistent with known cyclical indicators. On the other hand, our UC models for the output gap have limited forecasting power for inflation, since they underperform an arbitrary autoregressive model. JEL Classification: C32, E32, E37

Camba-Méndez, Gonzalo

Rodriguez-Palenzuela, Diego

English

Research Papers in Economics

EUROPEAN CENTRAL BANK
WORKING PAPER SERIES
WORKING PAPER NO. 54
ASSESSMENT CRITERIA FOR
OUTPUT GAP ESTIMATES
BY
GONZALO CAMBA-MENDEZ
AND DIEGO RODRIGUEZ-
PALENZUELA
April 2001EUROPEAN CENTRAL BANK
WORKING PAPER SERIES
*  European Central Bank.The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the European Central Bank.
We are grateful to G￿nter Coenen,Gabriel Fagan and Gabriel PØrez Quir￿s for helpful comments.
WORKING PAPER NO. 54
ASSESSMENT CRITERIA FOR
OUTPUT GAP ESTIMATES
BY
GONZALO CAMBA-MENDEZ
AND DIEGO RODRIGUEZ-
PALENZUELA
*
April 2001' European Central Bank,2001
Address Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
Postal address Postfach 16 03 19
D-60066 Frankfurt am Main
Germany
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Internet http://www.ecb.int
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All rights reserved.
Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.
The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank.
ISSN 1561-08103 ECB Working Paper No 54 ￿ April 2001
Contents
Abstract 5
1 Introduction 7
2 The Multivariate Models 10
2.1 An Unobserved Component (UC) Model 10
2.2 Reduced VAR Approach:Beveridge Nelson Decomposition 11
2.3 Reduced VAR Approach:Blanchard and Quah Decomposition 12
3 Model Assessment 14
3.1 Measures of Forecasting Performance 14
3.2 Measures of Consistency of Output Gap Estimates 15
4 Empirical Results 16
4.1 Euro wide Data Results 16
4.2 US Data Results 18
5 Conclusion 20
References 22
Technical Appendix 25
Tables and figures 27
European Central Bank Working Paper Series 394 ECB Working Paper No 54 ￿ April 20015 ECB Working Paper No 54 ￿ April 20016 ECB Working Paper No 54 ￿ April 20017 ECB Working Paper No 54 ￿ April 20018 ECB Working Paper No 54 ￿ April 20019 ECB Working Paper No 54 ￿ April 200110 ECB Working Paper No 54 ￿ April 200111 ECB Working Paper No 54 ￿ April 200112 ECB Working Paper No 54 ￿ April 200113 ECB Working Paper No 54 ￿ April 200114 ECB Working Paper No 54 ￿ April 200115 ECB Working Paper No 54 ￿ April 200116 ECB Working Paper No 54 ￿ April 200117 ECB Working Paper No 54 ￿ April 200118 ECB Working Paper No 54 ￿ April 200119 ECB Working Paper No 54 ￿ April 200120 ECB Working Paper No 54 ￿ April 200121 ECB Working Paper No 54 ￿ April 200122 ECB Working Paper No 54 ￿ April 200123 ECB Working Paper No 54 ￿ April 200124 ECB Working Paper No 54 ￿ April 200125 ECB Working Paper No 54 ￿ April 200126 ECB Working Paper No 54 ￿ April 200127 ECB Working Paper No 54 ￿ April 2001
Table 1
Forecasting Accuracy: Euro-wide Data. 
a28 ECB Working Paper No 54 ￿ April 2001
Table 2
Consistency of Sequential Cycles Estimates. Euro-wide Data
a29 ECB Working Paper No 54 ￿ April 2001
Table 3
Correlation between Capacity Utilisation and Output Gap: Euro-wide Data30 ECB Working Paper No 54 ￿ April 2001
Table 4
Forecasting Accuracy: US Data 
a31 ECB Working Paper No 54 ￿ April 2001
Table 5
Consistency of Sequential Cycles Estimates: US Data 
a32 ECB Working Paper No 54 ￿ April 2001
Table 6
Correlation between Capacity Utilisation and Output Gap: US Data3
3
E
C
B
 
W
o
r
k
i
n
g
 
P
a
p
e
r
 
N
o
 
5
4
 
￿
 
A
p
r
i
l
 
2
0
0
1
Cyclical Inflation UC1
-4
-3
-2
-1
0
1
2
3
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation UC2
-3
-2
-1
0
1
2
3
4
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation UC3
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap UC1
-0.05
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment UC1
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap UC2
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap UC3
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment UC2
-2
-1.5
-1
-0.5
0
0.5
1
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment UC3
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Figure 1 
Final (solid line) vs Recursive (dashed line) Cycle Estimates. Euro area ￿ UC Models3
4
E
C
B
 
W
o
r
k
i
n
g
 
P
a
p
e
r
 
N
o
 
5
4
 
￿
 
A
p
r
i
l
 
2
0
0
1
Cyclical Inflation BN1
-3
-2
-1
0
1
2
3
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation BN2
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation BN3
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BN1
-0.008
-0.006
-0.004
-0.002
0
0.002
0.004
0.006
0.008
0.01
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment BN1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BN2
-0.02
-0.015
-0.01
-0.005
0
0.005
0.01
0.015
0.02
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BN3
-0.02
-0.015
-0.01
-0.005
0
0.005
0.01
0.015
0.02
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment BN2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment BN3
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Figure  2
Final (solid line) vs Recursive (dashed line) Cycle Estimates. Euro Area ￿ BN Models3
5
E
C
B
 
W
o
r
k
i
n
g
 
P
a
p
e
r
 
N
o
 
5
4
 
￿
 
A
p
r
i
l
 
2
0
0
1
Cyclical Inflation BQ1
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation BQ2
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation BQ3
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BQ1
-5.00E-03
-4.00E-03
-3.00E-03
-2.00E-03
-1.00E-03
0.00E+00
1.00E-03
2.00E-03
3.00E-03
4.00E-03
5.00E-03
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BQ2
-0.008
-0.006
-0.004
-0.002
0
0.002
0.004
0.006
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BQ3
-0.008
-0.006
-0.004
-0.002
0
0.002
0.004
0.006
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Figure 3
Final (solid line) vs Recursive (dashed line) Cycle Estimates. Euro Area ￿ BQ Models3
6
E
C
B
 
W
o
r
k
i
n
g
 
P
a
p
e
r
 
N
o
 
5
4
 
￿
 
A
p
r
i
l
 
2
0
0
1
Cyclical Inflation UC1
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation UC2
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation UC3
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap UC1
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment UC1
-2
-1
0
1
2
3
4
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap UC2
-0.06
-0.05
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap UC3
-0.1
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment UC2
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Unemployment UC3
-8
-6
-4
-2
0
2
4
6
8
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Figure 4
Final (solid line) vs Recursive (dashed line) Cycle Estimates. US Data ￿ UC Models3
7
E
C
B
 
W
o
r
k
i
n
g
 
P
a
p
e
r
 
N
o
 
5
4
 
￿
 
A
p
r
i
l
 
2
0
0
1
Figure 5
Final (solid line) vs Recursive (dashed line) Cycle Estimates. US Data ￿ BN Models3
8
E
C
B
 
W
o
r
k
i
n
g
 
P
a
p
e
r
 
N
o
 
5
4
 
￿
 
A
p
r
i
l
 
2
0
0
1
Cyclical Inflation BQ1
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation BQ2
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Cyclical Inflation BQ3
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BQ1
-0.01
-0.008
-0.006
-0.004
-0.002
0
0.002
0.004
0.006
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BQ2
-1.00E-02
-8.00E-03
-6.00E-03
-4.00E-03
-2.00E-03
0.00E+00
2.00E-03
4.00E-03
6.00E-03
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Output Gap BQ3
-1.00E-02
-8.00E-03
-6.00E-03
-4.00E-03
-2.00E-03
0.00E+00
2.00E-03
4.00E-03
6.00E-03
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Figure 6
Final (solid line) vs Recursive (dashed line) Cycle Estimates. US Data Area ￿ BQ ModelsEuropean Central Bank Working Paper Series
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Assessment criteria for output gap estimates

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Assessment criteria for output gap estimates

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