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Using Real-Time Output Gaps to Examine Past and Future Policy Choices

Published online by Cambridge University Press:  26 March 2020

Christopher Adam  and
David Cobham
Christopher Adam
Affiliation:
University of Oxford
David Cobham*
Affiliation:
Heriot-Watt University
*
E-mail: [email protected]
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Abstract

Alternative measures of the UK output gap are considered for 1984–2007. The real-time series is strongly affected by the rolling-time estimation of the trend, and produces a picture of the business cycle which is not consistent with contemporary perceptions of the large fluctuations of the late 1980s and early 1990s. A new, ‘nearly-real’, measure developed here may be better for estimating historical reaction functions. In the context of the current recession, none of these mechanically derived measures of the output gap are useful. Policymakers should make careful estimates of the likely fall in potential output on the basis of other information.

Keywords

Output gapreal-timequasi-realnearly realTaylor ruleE52E58
Type
Articles
Information
National Institute Economic Review , Volume 210 , October 2009 , pp. 98 - 110
Copyright
Copyright © 2009 National Institute of Economic and Social Research

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Footnotes

∗

We are grateful to Chris Allsopp, Peter Andrews and Kalin Nikolov for helpful comments on a much earlier draft.

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