Potential output is the largest amount of products that can be produced by fully utilizing available labor and capital stock; the output gap is defined as the discrepancy between actual and potential output. If data on production factors contain measurement errors, total factor productivity (TFP) cannot be estimated accurately from the Solow residual (i.e., the portion of output that is not att...

The author evaluates the ability of a variety of output-gap estimators to accurately measure the output gap in a model economy. A small estimated model of the Canadian economy is used to generate artificial data. Using output and inflation data generated by this model, the author uses each output-gap estimation methodology to construct an estimate of the true output gap. He then evaluates the m...

This paper compares three models of the output gap in New Zealand – the Reserve Bank of New Zealand’s incumbent MV filter, estimates from a Structural VAR, and a multivariate unobserved components model – and investigates whether there are features that are consistent across the measures of the gap. Various detrending methods are used for benchmarking the output gap measures, including a linear...