Output Gap Research Articles

Initial Beliefs Uncertainty

Abstract This paper evaluates how initial beliefs uncertainty can affect data weighting and the estimation of models with adaptive learning. One key finding is that misspecification of initial beliefs uncertainty, particularly with the common approach of artificially inflating initials uncertainty to accelerate convergence of estimates, generates time-varying profiles of weights given to past observations in what should otherwise follow a fixed profile of decaying weights. The effect of this misspecification, denoted as diffuse initials, is shown to distort the estimation and interpretation of learning in finite samples. Simulations of a forward-looking Phillips curve model indicate that (i) diffuse initials lead to downward biased estimates of expectations relevance in the determination of actual inflation, and (ii) these biases spill over to estimates of inflation responsiveness to output gaps. An empirical application with U.S. data shows the relevance of these effects for the determination of expectational stability over decadal subsamples of data. The use of diffuse initials is also found to lead to downward biased estimates of learning gains, both estimated from an aggregate representative model and estimated to match individual expectations from survey expectations data.

A study on predictive analysis and rules for international financial risk considering debt crisis

Abstract This paper first establishes a system of international financial risk early warning indicators, constructs a VAR forecasting model for international financial risk, and uses the ADF test to identify the best amount of lags for the model before doing a smoothness test on the variables. The lagged values are used as independent variables to establish equations to describe the dynamic relationship between multiple variables. Then the model is tested for cointegration and Grange causality. The VAR model is then used to estimate the financial risk profile from the standpoint of a global economy and to examine the extent to which the debt crisis has affected international financial risk. The results show that at the 5% significant level, national debt expansion is the cause of asset price volatility, macroeconomic volatility, and debt risk. The forecasted inflation rate for 2023-2025 is 4.18, output gap is 4.94, and the policy interest rate is 4.18 for emerging Asian countries and regions.

Impact of Output Gap, COVID-19, and Governance Quality on Fiscal Space in Sub-Saharan Africa

This study examined the determinants of fiscal space within the Sub-Saharan Africa (SSA) region, utilising a panel of 33 countries from 2005 to 2021. The paper applied the panel threshold, difference, and system generalised method of moments (GMM) regression techniques. The empirical results found evidence of constrained fiscal space and poor governance in Central, Western, and Eastern Africa. The results further unveiled that an enhancement in governance indicators beyond −0.23 for the governance index, −0.15 for control of corruption, −0.98 for the rule of law, −0.37 for regulatory quality, −0.15 for voice and accountability, +0.36 for political stability, and −0.61 for government effectiveness, respectively, increase fiscal space. Moreover, the study concluded that the output gap, COVID-19, trade openness, and economic growth impact fiscal space availability in Central, Western, Southern, and Eastern Africa. The paper investigated whether the COVID-19 pandemic and governance quality significantly influenced fiscal space within SSA. We strongly recommend enhancement in all facets of governance through comprehensive restructuring of governance policies across all SSA countries. Another key recommendation is fostering trade openness to expand tax revenue generation and broaden the tax base, thereby providing the continent with greater fiscal space and improved resilience to unforeseen shocks.

Applying IoT Sensors and Big Data to Improve Precision Crop Production: A Review

The potential benefits of applying information and communication technology (ICT) in precision agriculture to enhance sustainable agricultural growth were discussed in this review article. The current technologies, such as the Internet of Things (IoT) and artificial intelligence (AI), as well as their applications, must be integrated into the agricultural sector to ensure long-term agricultural productivity. These technologies have the potential to improve global food security by reducing crop output gaps, decreasing food waste, and minimizing resource use inefficiencies. The importance of collecting and analyzing big data from multiple sources, particularly in situ and on-the-go sensors, is also highlighted as an important component of achieving predictive decision making capabilities in precision agriculture and forecasting yields using advanced yield prediction models developed through machine learning. Finally, we cover the replacement of wired-based, complicated systems in infield monitoring with wireless sensor networks (WSN), particularly in the agricultural sector, and emphasize the necessity of knowing the radio frequency (RF) contributing aspects that influence signal intensity, interference, system model, bandwidth, and transmission range when creating a successful Agricultural Internet of Thing Ag-IoT system. The relevance of communication protocols and interfaces for presenting agricultural data acquired from sensors in various formats is also emphasized in the paper, as is the function of 4G, 3G, and 5G technologies in IoT-based smart farming. Overall, these research sheds light on the significance of wireless sensor networks and big data in the future of precision crop production

Brazilian macroeconomic dynamics redux: Shocks, frictions, and unemployment in SAMBA model

This paper documents the recent changes in the structure and estimation procedures of the SAMBA model, providing a complete description of the decision problems that each economic agent faces, the first order conditions that solve those problems, and the new techniques employed to estimate the model. This updated version of the model incorporates new features, such as involuntary unemployment, imported goods in the consumption bundle and a new identified vector auto-regressive process for the rest of the world. Reflecting these changes, the set of observables was expanded to include, for instance, participation rates in the labor market and an exogenous measure of output gap. In face of increased complexity and the large number of observables, the model was estimated using Sequential Monte Carlo (SMC) methods, allowing for a smaller sensitivity to the choice of priors.

Using harmonic beam combining to generate pulse-burst in nonlinear optical laser

The ultrashort lasers working in pulse-burst mode reveal great machining performance in recent years. The number of pulses in bursts effects greatly on the removal rate and roughness. To generate a more equal amplitude of pulses in burst with linear polarization output and time gap adjustable, we propose a new method by the harmonic beam combining (HBC). The beam combining is commonly used in adding pulses into the output beam while maintaining the pulse waveform and beam quality. In the HBC, dichroic mirrors are used to combine laser pulses of fundamental wave (FW) into harmonic wave (HW), and nonlinear crystals are used to convert the FW into HW. Therefore, HBC can add arbitrarily more HW pulses to generate pulse-burst in linear polarization with simple structure. The amplitude of each pulse in bursts can be adjusted the same to increase the stability of the burst, the time gap of each pulse can be adjusted precisely by proper time delay. Because HBC adds pulses sequentially, the peak power density of the burst is the same as each pulse, pulses can be combined without concern of back-conversion which often occurs in high peak power density. In the demonstration, the extendibility of HBC was verified by combining two beams with a third beam. The combined efficiency rates were larger than 99%, and the beam quality of each beam was maintained at M 2 ≈ 1.4.

Ex-post and real-time estimations of the output gap: A new assessment of fiscal procyclicality in the eurozone

The revisions implemented twice a year by the European Commission significantly change not only the forecasts but also the past values of the output gap. Consequently, many possible time series exist. Based on a new approach for estimating a real-time definition of the business cycle, we develop a comparative framework between ex-post and real-time variables using dynamic panel data models with FE, GLS and AB estimators. The real-time version of the output gap solves the important endogeneity issue between the budget balance and the output gap. Considering the period from 1995 to 2021 and the 19 Eurozone countries, our analysis deepens the cyclical nature of fiscal policy, pointing to robust procyclicality. Regardless of the specification, fiscal policy was found to be procyclical, but real-time and ex-post estimates have shown some interesting discrepancies (i.e., on a real-time basis, discretionary budgetary decisions have never been significantly expansionary, and the likely positive effects of automatic stabilisers during economic downturns have been weakened by spending reductions and/or revenue increases). Our findings may help the future reform of the Stability and Growth Pact.

Nowcasting The Output Gap for Romania Using a Mixed-Frequency Approach

The assessment of the cyclical position of the economy represents for the monetary policy a crucial aspect in the decision-making process. Its relevance in this context is given by the characteristics of the indicator to be a measure of the degree of the inflationary pressures in the economy and to connect real economic activity and inflation.

Macroeconomic Stability and Optimal Policy Mix

Public welfare and macroeconomic stability should be the main objectives of fiscal and monetary policy cooperation. Monetary and fiscal policy should be coordinated better to maintain sustainable economic development. To implement fiscal measures and monetary controls, a balanced budget is necessary. This study uses data from 1976 to 2022. A macroeconomic stability check uses real GDP, current account balance, exports, real effective exchange rate, broad money (M2), foreign exchange reserves, consumer price index (CPI), nominal exchange rate, government expenditures, and government tax revenue. The VAR models we use are Impulse Response Functions (IRFs) and Variance Decompositions (VDs). CMR feels a negative impact, TRY, whereas M2G, GY, and others feel a positive impact. Achieving output and price stability requires higher call money rates, more tax revenues, and reduced government spending. Output gaps should be negative.M2G and CABY are negatively correlated, whereas CABY and CMR are positively correlated. If there is a negative output gap, monetary aggregates and taxes conflict with price and production stability; however, policy should aim to increase the current account balance. We recommend strict fiscal and monetary policy measures to stabilize output and limit inflation whenever there is a positive output gap. In addition to strengthening trade and foreign exchange reserves, reduced government spending will stabilize exchange rates; however, increasing tax revenue will counteract these benefits by strengthening the current account.

The effects of economic and financial shocks on private investment: A wavelet study of return and volatility spillovers

This paper examines the linkage between private investments and shocks in economic and financial indicators. Using data from India, we study the return and volatility spillovers from crude price, credit availability, real exchange rate, inflation, output gap, government spending, and economic policy uncertainty to private investments. We combine the ARMA-GARCH model with wavelet multiresolution analysis to capture the multiscale features of return and volatility spillovers among the time series. Our findings uncover spillovers in the time-scale decomposed series that are otherwise not observable in the original data, thereby throwing new light on the private investment-macroeconomic shock relationship. Private investment receives return spillovers from all variables at lower frequencies. Volatility spillovers from credit availability, exchange rate, output gap, and public investment exist at higher frequencies. The findings are robust to different forecast horizons, window sizes, frequency of data observation, and methodology of volatility extraction.

Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

Abstract We investigate whether the Federal Reserve has responded systematically to house and stock prices and whether this response has changed over time using a Bayesian structural VAR model with time-varying parameters and stochastic volatility. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices, and stock prices. Our results indicate that the systematic component of monetary policy in the United States responded to real stock price growth significantly but episodically, mainly around recessions and periods of financial instability, and took real house price growth into account only in the years preceding the Great Recession. Around half of the estimated response captures the predictor role of asset prices for future inflation and real economic activity, while the remaining component reflects a direct response to stock prices and house prices.

Time-Varying Uncertainty of the Federal Reserve's Output Gap Estimate

AbstractA factor stochastic volatility model estimates the common component to output gap estimates produced by the staff of the Federal Reserve, its time-varying volatility, and time-varying, horizon-specific forecast uncertainty. The output gap estimates are uncertain even well after the fact. Nevertheless, the common component is clearly procyclical, and positive innovations to the common component produce movements in macroeconomic variables consistent with an increase in aggregate demand. Heightened macroeconomic uncertainty, as measured by the common component's volatility, leads to persistently negative economic responses.

Inflation Targeting, Exchange Rate Distortion and Output Stabilisation A Case of Zimbabwe Disinflation

Inflation targeting (IT) is practised in many countries and the real effects of strict inflation targeting were investigated on several occasions and less on other variants of IT. The study investigates the effects of inflation targeting lite on output. In particular, the compatibility of inflation targeting lite with managed exchange rate regime on output stabilization. The inflation targeting regime, the operating environment and exchange rate regimes were reviewed for Zimbabwe. An ARDL model was adopted as the empirical strategy to investigate the compatibility problem and the real effects of IT lite. Modelling output as output gap, inflation targeting lite and the exchange rate regimes were found to be inconsistent with output stabilization. IT lite and exchange rate premium increased the output gap, however the interaction between IT lite and exchange rate premium had negative effects on output. These results hold for both the short run and long run. However, considering the official rate and parallel rate separately, parallel rate has a negative effect but its interaction with IT has positive effects. The study recommends that developing countries should consider the exchange rate systems before the adoption of IT as a monetary policy framework. A floating exchange rate seemed to be compatible with IT lite.

The Federal Reserve's output gap: The unreliability of real‐time reliability tests

SummaryOutput gap revisions can be large even after many years. Real‐time reliability tests might therefore be sensitive to the choice of the final output gap vintage that the real‐time estimates are compared to. This is the case for the Federal Reserve's output gap. When accounting for revisions in response to the global financial crisis in the final output gap, the improvement in real‐time reliability since the mid‐1990s is much smaller than found by Edge and Rudd (Review of Economics and Statistics, 2016, 98(4), 785–791). The negative bias of real‐time estimates from the 1980s has disappeared, but the size of revisions continues to be as large as the output gap itself. We systematically analyse how the real‐time reliability assessment is affected through varying the final output gap vintage. We find that the largest changes are caused by output gap revisions after recessions. Economists revise their models in response to such events, leading to economically important revisions for not only the most recent years but also reaching back up to two decades. This might improve the understanding of past business cycle dynamics but decreases the reliability of real‐time output gaps ex post.

Asymmetries in multi-target monetary policy rule and the role of uncertainty: Evidence from China

Have monetary policies asymmetrically responded to targets besides output and inflation? Multiple targets have been found to exist for monetary authority, and uncertainty is having a growing impact on monetary policy in China. Using the nonlinear autoregressive distribution lag (NARDL) model and data from China from 2001Q1–2022Q3, we build a multi-target monetary policy rule with uncertainty and verify the monetary authority’s asymmetric reactions to the exchange rate, housing price, and uncertainty. Specifically, the Monetary authority of China responds more to a decline than increase in the output gap, and responds more to an increase than decrease in the inflation gap, exchange rate gap, housing price gap, and uncertainty. This practice supports the view of expanding the targets of the Taylor rule, while also providing innovative ideas for asymmetric monetary policy responses for countries with an economic structure or population density comparable to China.

Globalization and inflation dynamics: evidence from emerging economies

ABSTRACT We test the impact of globalization on the inflation process (global slack hypothesis) for 15 emerging economies over the period (1996Q1-2019Q4). The novelty of this article lies in testing the impact of globalization on the inflation process. We introduce the smooth transition regression (STR) model of the Phillips curve to capture the gradual impacts of globalization on inflation dynamics. The main results are as follows. (i) The asymmetries in inflation exist that are not captured by the linear Phillips curve. (ii) The domestic output gap remains a main driving force of inflation. (iii) Globalization based on the trade weighted average of the domestic output gap does not affect the inflation process compared to other variables like the trade openness, import prices, real exchange rate and international oil prices. Our results yield important implications that the central banks of the emerging economies can stabilize inflation and output gap in an effective way, exploiting the inflation-output gap relationship. When economic expansion of the trading partners increases, the process of inflation dynamics changes in two economies (Brazil, and China).

International linkages of term structures: US and Korea Treasury bond yields

This study analyzes the international linkages of term structures between the United States (US) and Korea using a Gaussian dynamic term structure model. The empirical analysis shows that the US level factor makes the most important contribution to the Korean term structure fluctuations. When two separate channels (i.e., policy and risk-compensation) are considered for propagating structural shocks into Korean bond yields, the policy channel dominates for the short-term rates, whereas for the long-term yield, the policy channel is dominant for the US level shock, but the risk channel is dominant for other shocks. These results are sensitive to whether or not small-sample bias is corrected. With a help of the bias correction, term premium estimates in the US and Korea exhibit substantial countercyclicality with respect to the US output gap. The US slope factor, which also has a significant impact on Korean long-term yields, is closely related to the global liquidity conditions for Korean bond returns.

Evaluating Fiscal Policy Under Cyclical Balance in Developed Countries

Abstract This study investigates the cyclical patterns of fiscal policy rules using various policy variables that respond to the macroeconomic performance of developed countries over the past few decades. The study reveals that regardless of whether the economy is in a recession or a boom, fiscal policy basically displays counter-cyclical behavior. However, the degree of cyclicality varies depending on the output gap measurements chosen and the countries analyzed. Additionally, the estimates using various fiscal policy indicators demonstrate a strong time variation in fiscal cyclical behavior, resulting in a significant increase in the counter-cyclicality of the fiscal balance. The article also applies the time-varying coefficients vector autoregression model to assess the effects of fiscal policy on output and finds that a boost in the cyclically adjusted primary balance positively impacts production in the short run.

Fiscal multipliers, public debt anchor and government credibility in a behavioural macroeconomic model

We develop a behavioural macroeconomic model to investigate the question of fiscal policy credibility and how agents’ expectations about the output gap, public debt, expenditure and taxation affect the fiscal multiplier and debt stability. To do this, we model heterogeneous expectation-formation processes in a market populated by fundamentalists and chartists, agents being able to switch from one rule to another depending on the effective outcome in each period. This model produces waves of optimism and pessimism along the business cycle. We show in this article that when agents are optimistic about the future output gap and public debt, the fiscal multiplier tends to be larger whatever the nature of the fiscal shock. It also appears that fiscal expansion has less of a negative effect on public debt. Furthermore, agents’ expectations about public debt and the fiscal credibility of the government affect indicators of government performance (the fiscal multiplier and public debt stability).

Output gap and consumption risk on the cross-section of stock returns in Korea

We examine if output gap can be the conditioning information for consumption-based asset pricing model in the Korean stock market. In an effort to empirically explain the cross-sectional variation of stock returns with economic equilibrium model, our conditioning variable, output gap, enables consumption capital asset pricing model (CCAPM) to explain a substantial variation in the cross-section of stock returns in Korea. In addition, the conditional version of CCAPM with output gap as a conditioning variable can explain the cross-section of stock returns about as well as the Fama-French three- and five-factor model when using future consumption growth. Asset's riskiness is determined by the correlation with consumption growth conditional on the business cycle measured by the output gap. (JEL G12).