RBNZ paper develops ‘intuitive and reliable’ output gap measure

reserve-bank-of-new-zealand-rbnz-2
The Reserve Bank of New Zealand

A paper recently published by the Reserve Bank of New Zealand (RBNZ) proposes a new method of estimating the output gap that seems to outperform some other measures.

Authors Güneş Kamber, James Morley and Benjamin Wong use a Beveridge-Nelson (BN) decomposition as their starting point. BN methods define the trend as the long-horizon forecast – but while “conceptually simple and elegant”, they also possess properties “highly at odds” with widely held beliefs on the dynamics of the output gap.

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