Closer to Finding Yeti (Rethinking the output gap methodology through the lens of fiscal policy stance plausibility)

  • 22. 8. 2023

This study represents the views of the authors and do not necessarily reflect those of the Council for Budget Responsibility (CBR).

This paper offers a synthesis of several approaches to measuring output gap in Slovakia and serves as an update of the original CBR work Finding Yeti after almost a decade. A “suite of models” approach is estimated and assessed to provide advantages over single models. Following the recommendation of the EU IFIs guide suggesting no one-size-fits-all approach for measuring output gap, our family of methods consist of two unobserved component models, principal component model, semi-structural model and Modified Hamilton filter. We propose a novelty approach to weighting the individual models capturing recent structural innovations in the economy to construct one central estimate of the output gap. Such a robust estimate is maximising its overall plausibility and applicability to prudent fiscal policy assessment.

 Keywords: output gap, unobserved component, trend, cycle, plausibility, Bayesian analysis, estimation

JEL – codes: C11, C13, C32, E32, E62