Unobservable-Component Estimates of Output Gaps in Five Asian Economies

Abstract

This working paper was written by Mark Crosby (University of Basel and CEPR) and Glenn Otto (Hong Kong Institute for Monetary Research).

This paper estimates output gaps for Hong Kong, Korea, the Philippines, Singapore and Taiwan, employing the HP filter and unobservable-components (UC) techniques. The latter approach assumes that actual output is the sum of potential output, which follows a random walk with a time-varying drift, and a stationary output gap. While the results imply that UC methods are useful in estimating output gaps in Asia, simple Phillips curves suggest that the information contents of the two measures of the gap are essentially identical. The main advantage of the UC technique is that it allows the construction of confidence bands for the gap.

Keywords: Output gaps, unobservable components, Kalman filtering

JEL Classification: C5, E3