Information Rigidities and the News-Adjusted Output Gap

A vector-autoregressive model of actual output and expected output obtained from surveys is used to test for information rigidities and to provide a characterisation of output dynamics that accommodates these information structures. News on actual and expected outputs is decomposed to identify innovations understood to have short-lived effects and these are used with the model to derive a `news-adjusted output gap' measure. The approach is applied to US data over 1970q1-2014q2 and the gap measure is shown to provide a good leading indicator of inflation and to capture inflationary pressures well through estimated New Keynesian Phillips curves.

This event is organised by the Econometric Institute.
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