Finance and Economics Discussion Series

Real-Time Properties of the Federal Reserve's Output Gap

Rochelle M. Edge and Jeremy B. Rudd
2012-86

Abstract: This note considers the reliability of Federal Reserve Board staff estimates of the output gap after the mid-1990s, and examines the usefulness of these estimates for inflation forecasting. Over this period, we find that the Federal Reserve's output gap is more reliably estimated in real time than previous studies have documented for earlier periods and alternative estimation techniques. In contrast to previous work, we also find no deterioration in forecast performance when inflation projections are conditioned on real-time estimates of the output gap.

Keywords: Output gap, potential output, real-time data, inflation forecasting