Working Paper: CEPR ID: DP14943
Authors: Fabio Canova
Abstract: I investigate the properties of potentials and gaps, of permanent and transitory fluctuations using a variety of DSGE models. Model-based gaps display low frequency variations; have similar frequency representation as potentials, and are correlated with them. These features depend on the properties of the disturbances but not on frictions or modeling principles. Permanent and transitory fluctuations display similar features, but are uncorrelated.I use a number of filters to extract trends and cycles from simulated data. Distortions are large. Gaps are best approximated with a polynomial filter; transitory fluctuations with a differencing approach. I design a filter which reduces the biases of existing filters.
Keywords: gaps; potentials; permanent and transitory components; filtering; cyclical fluctuations; gain functions
JEL Codes: C31; E27; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model-based gaps (C51) | potentials (L94) |
| disturbances (C62) | fluctuations in output gaps and potentials (E32) |
| choice of filter (C52) | estimation of gaps and potentials (C13) |