E A Better Way To Calculate The Output Gap

After the 2008 crisis, the CBO showed a large negative output gap. From my research, their number was wrong. My research showed a smaller negative output gap. As well my number returned to a positive output gap in late 2010, but it took the CBO's number until 2018 to return to a positive output gap.

The CBO also adjusted their number regularly upwards as it appeared that they realized time and again that their number was too low. I never adjusted my equation. It is a fixed equation based on a ratio between Capacity Utilization and Labor Share.

The large negative output gap affected the central bank's policy. The effect was to keep monetary policy loose.

Here is a graph showing my calculation against the CBO calculation. You will see that the CBO's calculation finally returned to my calculation in early 2019 and stayed equal to my calculation exactly throughout 2019. This supports my calculation as being more stable and reliable. Once the CBO returned to my calculation, they stabilized with my calculation.

(Click on image to enlarge)

One only needs to look at the above graph and realize that there may be a better way to calculate the output gap.

Disclosure: None.

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Comments

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Gary Anderson 6 months ago Contributor's comment

Loose money caused the piling on of debt that puts all markets at greater risk. Add on Coronavirus and much of this speculative paper could go bad.

Edward Lambert 6 months ago Author's comment

I can add that the economy is made weaker with a low cost of money. It is like there is an addiction to low-cost money. Low inflation is related to this.