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Measuring the natural output level by DSGE models: An empirical investigation for Switzerland

Swiss Journal of Economics and Statistics volume 146, pages 275–300 (2010)Cite this article

Summary

The output gap plays an important role in the assessment and conduct of monetary policy. Most of the current literature, however, relies on filtering procedures which use ad hoc smoothness arguments for identification. Furthermore, they are subject to end-of-sample problems and do not provide estimates of the output gap based on economic theory. In contrast, our model-based approach relies on a precise definition of the natural level of output and consequently of the output gap. This paper provides, for the first time, an estimate of the output gap based on a DSGE small open economy model for Switzerland. We use Bayesian econometrics to derive an estimate of the output gap, which is then compared to some alternatives. Except for the last years, our measure of the output gap is close to zero most of the time. This suggests that price rigidities play a minor role in the propagation of the Swiss business cycle. We show that our estimate produces sensible and robust results which encourage further research.

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Authors and Affiliations

  1. Department of Economics, University of Bern, Schanzeneckstrasse 1, 8573, CH-3001, Berne, Switzerland

    Stefan Leist & Klaus Neusser

Authors
  1. Stefan Leist
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  2. Klaus Neusser
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Correspondence to Stefan Leist.

Additional information

We thank Gregor Bäurle, Harris Dellas, Marvin Goodfriend, Yvan Lengwiler and Jean-Marc Natal, as well as many conference participants, for helpful comments and constructive criticism. We are, in particular, grateful to Gregor Bäurle for letting us use his MATLAB codes.

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Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Leist, S., Neusser, K. Measuring the natural output level by DSGE models: An empirical investigation for Switzerland. Swiss J Economics Statistics 146, 275–300 (2010). https://doi.org/10.1007/BF03399307

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  • DOI: https://doi.org/10.1007/BF03399307

JEL-Classification

  • C11
  • C51
  • E32
  • F41

Keywords

  • DSGE models
  • Bayesian econometrics
  • output gap
  • natural level of output
  • small open economy