Estimating Output Gaps in Open Economies

Abstract

Estimating the output gap remains a critical challenge for macroeconomic policy due to data limits, reporting lags, and global shocks. This dissertation extends the Beveridge-Nelson (BN) decomposition framework across three chapters to provide more reliable, informative, and timely indicators of economic slack for emerging Asian economies and Australia, demonstrating that multivariate and mixed-frequency BN frameworks improve real-time policy decision-making.

The first chapter shows that the BN filter provides more reliable estimates for emerging Asian economies than Hodrick-Prescott, Christiano-Fitzgerald, or Hamilton filters. Cyclical consumption is more volatile than the output gap, and less than one-third of GDP growth fluctuations stem from trend shocks, countering the "cycle is the trend" view. Crucially, BN estimates suffer from smaller, less frequent revisions during major economic shifts.

The second chapter reveals that while traditional domestic slack measures are uninformative for Southeast Asian economies due to structural issues and informal employment, financial and external variables are highly relevant. Financial factors dominated during the Asian and Global Financial Crises, with external variables often explaining a larger share of cyclical fluctuations than domestic output.

The third chapter applies a mixed-frequency framework to Australia. It finds that the labor market's intensive margin (aggregate hours worked) offers a more significant informational contribution than headline unemployment. Furthermore, the Trade Weighted Index (TWI) provides informational value nearly equivalent to the entire financial or macroeconomic sectors combined. While domestic shocks drive most Australian fluctuations, the Global Financial Crisis was largely driven by foreign shocks. Finally, a weekly TWI indicator allows for more timely updates but does not improve nowcast accuracy relative to a monthly frequency.