Output Gaps In Real Time: How Reliable Are They?

The output gap is of central interest to policymakers. Being unobservable, however, its estimation is prone to error, particularly in real time. Errors result from revisions to the data and unavoidable end-point problems associated with the econometric techniques used to estimate it. This is the first study of the seriousness of these problems for Australia. Over a 28-year period, we obtain real-time output-gap estimates which are unbiased and highly correlated with final estimates derived with the latest data and the benefit of hindsight. We conclude that reasonably reliable output gap estimates can be obtained in real time.