This paper investigates strategies for real-time estimation of the output gap. First, I examine estimates from univariate models with stochastic cycles. This corresponds to the use of model-based band-pass filters in real-time, and I find that the turning points in real-time and final output gap series match more closely for higher order models and that the revisions properties and real-time accuracy are more favorable. Second, I investigate the use of capacity utilization as an auxiliary indicator to improve on output gap estimates in real-time. I find that this bivariate approach leads to significant gains in the accuracy of real-time estimates and in the quality of revisions.
The chart below shows Cspscity Utlization (an FRB data series) against recessionary periods. The horizontal line is the dividing line between noninflationary and inflationary growth (of course it is a more gradual and lagged process, but I am keeping it simple).
The Fed is a long way from considering s hike in the funds rate and now we know their gauge to measure just how far away they are.