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Forecasting output gaps in the G‐7 countries: The role of correlated Innovations and structural breaks.

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Dungey, M and Jacobs, JPAM and Tian, J (2016) Forecasting output gaps in the G‐7 countries: The role of correlated Innovations and structural breaks. Discussion Paper. University of Tasmania. (Unpublished)

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Abstract

Trend GDP and output gaps play an important role in fiscal and monetary policy
formulation, often including the need for forecasts. In this paper we focus on fore-
casting trend GDP and output gaps with Beveridge-Nelson (1981) trend-cycle
decompositions and investigate how these are affected by assumptions concern-
ing correlated innovations and structural breaks. We evaluate expanding win-
dows, 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 Type: Report (Discussion Paper)
Keywords: trend, output gap, trend-cycle decomposition, real GDP, forecasts, structural break
Publisher: University of Tasmania
Identification Number - DOI: 978‐1‐86295‐889‐0
Additional Information:

Discussion Paper Series N 2016-04

Date Deposited: 27 Mar 2017 00:05
Last Modified: 27 Mar 2017 03:16
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