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arXiv · 2201.05556

Monitoring the Economy in Real Time: Trends and Gaps in Real Activity and Prices

Thomas Hasenzagl·Filippo Pellegrino·Lucrezia Reichlin·Giovanni Ricco
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Abstract

We propose two specifications of a real-time mixed-frequency semi-structural time series model for evaluating the output potential, output gap, Phillips curve, and Okun's law for the US. The baseline model uses minimal theory-based multivariate identification restrictions to inform trend-cycle decomposition, while the alternative model adds the CBO's output gap measure as an observed variable. The latter model results in a smoother output potential and lower cyclical correlation between inflation and real variables but performs worse in forecasting beyond the short term. This methodology allows for the assessment and real-time monitoring of official trend and gap estimates.

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Thomas Hasenzagl, Filippo Pellegrino, Lucrezia Reichlin, Giovanni Ricco. 2022-01-14. Monitoring the Economy in Real Time: Trends and Gaps in Real Activity and Prices. https://arxiv.org/abs/2201.05556

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