The National Bank of Denmark has published a working paper proposing a new filter that estimates two distinct output gaps implied by standard macroeconomic theory. The approach aims to clarify what is being measured and identify when policymakers face trade-offs in stabilizing the economy. The paper uses analytical and empirical evidence to show that existing output gap filters disagree because they measure different things. The two theoretically implied gaps can diverge, and it is unclear whether existing filters track either gap, neither or a mixture of both. The proposed filter estimates both gaps explicitly, making the distinction between them visible.
National Bank of Denmark publishes research proposing a filter to estimate two distinct output gaps
The National Bank of Denmark has published research proposing a filter that separately estimates two output gaps implied by standard macroeconomic theory. The paper finds that existing filters disagree because they measure different things, while the proposed approach clarifies the measures and when stabilization trade-offs arise.