Information rigidities and the news-adjusted output gap
Garratt, Anthony and Lee, Kevin and Shields, Kalvinder (2016) Information rigidities and the news-adjusted output gap. Journal of Economic Dynamics and Control, 70 . pp. 1-17. ISSN 01651889
A vector-autoregressive model of actual output and expected output obtained from surveys is used to test for information rigidities and to provide a characterisation of output dynamics that accommodates these information structures. News on actual and expected outputs is decomposed to identify innovations understood to have short-lived effects and these are used with the model to derive a ‘news-adjusted output gap׳ measure. The approach is applied to US data over 1970q1–2014q2 and the new gap measure is shown to provide a good leading indicator of inflation.
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