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Forecasting output gaps in the G-7 countries: the role of correlated innovations and structural breaks

Citation

Dungey, M and Jacobs, JPAM and Tian, J, Forecasting output gaps in the G-7 countries: the role of correlated innovations and structural breaks, Applied Economics, 49, (45) pp. 4554-4566. ISSN 0003-6846 (2017) [Refereed Article]

Copyright Statement

Copyright 2017 Informa UK Limited, trading as Taylor & Francis Group

DOI: doi:10.1080/00036846.2017.1284998

Abstract

Trend GDP and output gaps play an important role in fiscal and monetary policy formulation, often including the need for forecasts. In this article, we focus on forecasting trend GDP and output gaps with Beveridge-Nelson trend-cycle decompositions trend-cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks. We evaluate expanding window, one-step-ahead forecasts indirectly for the G-7 countries on the basis of real GDP growth rate forecasts. We find that correlated innovations affect real GDP growth rate forecasts positively, while allowing for structural breaks works for some countries but not for all. In the face of uncertainty, the evidence supports that in making forecasts of trends and output gap policy-makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks.

Item Details

Item Type:Refereed Article
Keywords:trend; output gap; trend-cycle decomposition; real GDP; forecasts; structural break
Research Division:Economics
Research Group:Econometrics
Research Field:Economic Models and Forecasting
Objective Division:Economic Framework
Objective Group:Macroeconomics
Objective Field:Economic Growth
Author:Dungey, M (Professor Mardi Dungey)
Author:Jacobs, JPAM (Dr Jan Jacobs)
Author:Tian, J (Dr Jing Tian)
ID Code:114660
Year Published:2017
Deposited By:Economics and Finance
Deposited On:2017-02-23
Last Modified:2017-11-13
Downloads:0

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