Real Time Representation Of The UK Output Gap In The Presence Of Trend Uncertainty

This paper describes an approach that accommodates in a coherent way three types of uncertainty when measuring the output gap. These are trend uncertainty (associated with the choice of model and de-trending technique), estimation uncertainty (with a given model) and data uncertainty (associated with the reliability of data). The approach employs VAR models to explain real time measures and realisations of output series jointly along with Bayesian-style 'Model averaging' procedures. Probability forecasts provide a comprehensive representation of the output gap and the associated uncertainties in real time.