Estimating The Output Gap: A SVAR Approach: Vinícius Botelho Samuel Pessoa Silvia Matos

Introduction Output Gap Estimation Small economy model
Estimating the Output Gap: a SVAR Approach

Vincius Botelho Samuel Pessoa January, 2014 Silvia Matos
IBRE - Instituto Brasileiro de Economia
Vincius Botelho, Samuel Pessoa, Silvia Matos
Objectives
Forecast ination Better understand the transmission of demand shocks through the economy Better understand the eects of macroeconomic policy (interest rates and scal decits) on the economy Introduce a new methodology for estimating the output gap, compatible with existing ones, such as the HP lter
Literature Review: SVAR

Gali (1992) was one of the rst papers combining short and long-run restrictions on a SVAR (estimating an IS-LM model).
The combination of short and long-run restrictions is a highly non-linear problem (solved under numerical optimisation routines). This can be troublesome specially for calculating standard deviations using the Monte Carlo procedure.
Bjrnland and Leitemo (2009) estimated the interdependence of US monetary policy and the stock market using a SVAR with both short-run and long-run restrictions. The identication of these models has been a ourishing subject of study.
Rubio-Ramrez, Waggoner, and Zha (2010), RWZ from now on, provide a framework for global identication of SVAR's with non-linear restrictions. Binning (2013) provides a framework for combining short-run and long-run restrictions with sign restrictions
Literature Review: Output Gap

Canova (1995) nds that the HP Filter tends to be the best strategy (along with a frequency domain masking of the low frequency components of the series) to generate a reference for the business cycle uctuations. Rennison (2003) nds that the output gap measured by a SVAR is robust to violations in its identifying restrictions and that the most accurate estimator for the output gap combines the HP Filter and a Blanchard-Quah SVAR. de Brouwer (1998) also nds that the HP Filter, the unobserved component models, and the production function approach provide very similar results.
Vincius Botelho, Samuel Pessoa, Silvia Matos Estimating the Output Gap: a SVAR Approach
Literature Review: Output Gap

The deterministic trend, moving average, and HP Filter (unconstrained) generate very similar results in terms of forecasting performance (Araujo, Areosa, and Guilln, 2004). Although outperformed by the Beveridge-Nelson methodology, the moving average, HP, BN, and production function approaches seem to have strong short-term comovements (Araujo, Areosa, and Guilln, 2004). Claus (1999) also uses a SVAR for estimating the output gap on New Zealand. Alves and Correa (2013) shows that the unemployment rate and capacity utilization explain dierent aspects of ination.
Identication of demand shocks using SVAR: Gains

Flexibility for the choice of restrictions from the economic theory Greater stability of results (when compared to the HP Filter) Not signicantly sensitive to data from the end (or beginning) of the sample Superior performance to t past ination Change of the identication restrictions may lead to measures on the output gap more adequate to understand some sectoral measures of ination The choice of identication restrictions matter: some specications may underperform the HP Filter
Identication of demand shocks using SVAR: Costs

Each identication strategy that do not use the Cholesky decomposition need to be tested individually. Their implementation is not straighforward.
There is a local identication test in Hamilton (1994). There is a global identication test in Rubio-Ramirez, Waggoner, and Zha (2010).
Algorithms for estimation of SVARs with short and long-run restrictions may be innecient. The absence of ecient algorithms for the estimation of SVARs with both short-run and long-run restrictions makes particularly dicult the calculation of condence intervals (since the Monte Carlo procedure involves repeating these estimations several times).
Framework
Comparison of results from four reduced forms for the output gap
(Benchmark): HP Filter SVAR with short-run (triangular) restrictions SVAR with short-run (non-triangular) restrictions SVAR with short-run and long-run restrictions
Decomposition of demand shocks from the residuals of the GDP equation (in order to compare these results with those of HP lter) Estimation of small model for the Brazilian economy
VAR Estimation SVAR Identication Estimation of Output Gap from Demand Shocks Results Phillips Curve Fit Uncertainty of Estimation
Variables and Data

The variables were chosen according to the production function approach. We assumed the Brazilian production function has a Cobb-Douglas form GDP t = At E t (K t (1 NUCI t )) Lt 1 Taking logs and derivatives we obtain a stationary form for the GDP equation At is the total factor productivity and E t is the external component of domestic growth: there is a global growth movement which is not fully captured by changes in hours worked or capacity utilization. Data are seasonally adjusted, from 1996Q1 to 2013Q3. We used the Brazilian GDP, US GDP, Gross Fixed Capital Formation, and NUCI public series. For the hours worked we used an index calculated by IBRE from 1996.
VAR Results
The VAR(2) was chosen by AIC, FPE, LR, and HQ criteria. Its residuals correlogram shows almost no residual autocorrelation. Variable Steady-state (annual %) Brazilian GDP 2.9 External GDP 2.3 Hours worked 1.6 Capacity utilization 0.1 Gross xed capital investment 4.2
The Identication Issue

The reduced-form VAR model can be written as
k
Y t = 0 +
Y t j j + Au t
j =1
All j coecients are easily identied using OLS. A is identied by the residuals' variance-covariance matrix (COV), using the identities below.
E t [COV ] = E t [Au t u t A ] Inasmuch as E t [u t u t ] = I and A is xed, E t [COV ] = AA However, A has 25 variables and COV is symmetric.
Therefore, we have only 15 equations and we need at least 10 identication restrictions in order to have 25 equations and 25 variables.
The Identication Issue

Be ai ,j the element on the i -th row and j -th column of matrix A. Therefore, restrictions on the short-run matrix are characterized by equations of the form ai ,j = 0. To dene long-run restrictions we need to dene the matrix of accumulated shocks (LR).
k
1
LR =
j =1
AT
A long-run restriction is a zero on one of the elements of LR .
Identication Restrictions
SVAR (SR and LR): We will assume three dierent hypotheses (10 identication restrictions): Brazil is a small open economy.
Therefore, Brazilian series cannot aect the external component (under the short and long run). This accounts for 6 restrictions (3 on the short run and 3 on the long run) This accounts for 2 restrictions: one on the short run and another on the long run. This accounts for 2 restrictions: one on the short run and another on the long run.
An increase in GDP may be caused by an increase in the hours worked, but not the opposite. An increase in GDP may be caused by an increase in the NUCI, but not the opposite.
Identication Restrictions
Cholesky decomposition (hours worked is the 'most endogenous' process
Hours worked Capacity utilization Gross formation of xed capital Brazilian GDP US GDP
SVAR (SR)
US GDP is exogenous Hours worked, NUCI, and gross formation of xed capital are not aected contemporaneously by the GDP (but the opposite). Hours worked and NUCI are not aected by the gross formation of xed capital (but the opposite). Brazilian GDP is not directly aected by US GDP.
Identication Conditions
The number of restrictions rule out only the order condition violation Only the Cholesky estimates are always identied (since they rely solely on the sign of the variance-covariance matrix, which is always positive) The rank condition found in Hamilton (1994) classify model SVAR (SR) as identied The rank condition test in RWZ has concluded our SVAR (SR and LR) is almost globally identied (the set of parameters not identiable, if it exists, has zero measure)
Local Identication Test (Hamilton, 1994)

Using Hamilton's (1994) notation:
B 0 y t = x t + u t E (u t u T t )=D E (u t u T t k ) = 0, k 1
1 1 = B0 DB 0 T T 1 T D+ n = (D n D n ) D n
D n is the duplication matrix: D n vech() = vec vec (B 0 ) = S B B + s B (B are the parameters of B 0 ) vec (D ) = S D D + s D (D are the parameters of D )
Local Identication Test (Hamilton, 1994)
Partial identication condition: the matrix J must have full column () vech Alternatively: rank. J = vech T T
B D
1 J = 2D + n ( B 0 )S B
1 1 D+ n [(B 0 ) (B 0 )]S D
Global Identication Test (RWZ)

Using RWZ's (2010) notation:
T yT t A0 = x t A+ + t
E(
T t t )
=I
another in which the non-linear restrictions become linear) If M j (f (A0 , A+ )) is of rank n for 1 j n the SVAR is globally identied at the parameter point (A0 , A+ )
M j (f (A0 , A+ )) = Q j f (A0 , A+ ) I j 0jx (nj )
Q j represents the SVAR's linear and non-linear restrictions: Q j f (A0 , A+ )e j = 0 (e j is the j-th column of the identity matrix I n and f () transforms the original parameter space to
Decomposition of Shocks
Be u t a vector for the ve underlying shocks on our economy (external, productivity, investment, capacity utilization, and hours worked) and e t the residuals obtained from our VAR. Therefore u t = A1 e t provides us a data series for each of these ve shocks. Then it is possible to compute the expected value for our system of equations if only some of these ve shocks happened. We dene the part of GDP growth caused by the shocks in hours worked and capacity utilization as output gap.
Output Gap: SVAR (SR and LR) and HP Filter

102
4 2 0
2 4
SVAR SR and LR SVAR SR and LR 4Q HP Filter 3Q2002 3Q2007 3Q2012

3Q1997
Output Gap: SVAR (SR) and HP Filter

4 2 0
2 4 102
SVAR SR SVAR SR 4Q HP Filter 3Q2002 3Q2007 3Q2012

3Q1997
Output Gap: SVAR (Cholesky) and HP Filter

102
4 2 0
2 4
Cholesky Cholesky 4Q HP Filter 3Q2002 3Q2007 3Q2012

3Q1997
All Methodologies
102
4 2 0
2 4
3Q1997
3Q2002
3Q2007
3Q2012
HP Filter Cholesky SVAR SR SVAR SR and LR
Outlines
Although the HP Filter indicates the economy is under its growth potential, two dierent SVAR measures indicate the economy is overheated (the ones which provide the better models for free and services prices). Both indicate a deceleration in the last quarter, but are still positive. On 4Q2002 there was a monetary policy shock, starting a tightening cycle that would end by 1Q2003. Full SVAR Gap indicates a negative demand shock on 4Q2002 (while the HP Gap increased in this period). This is a pattern for the Full SVAR and for the SVAR with only short-term restrictions.
Outlines
There was a monterary policy shock on 2Q2008 captured by the HP Filter only on 4Q2008. However, all the 3 SVAR methodologies showed a contraction (indicating the negative demand shock) on 3Q2008. Since 2012 the HP lter indicates a deationary output gap (while there is no deation). Our SVAR indicates the presence of a residual demand pressure in the economy since then (up to 3Q2013). The Cholesky and SVAR with short-term restrictions show a slightly negative gap for the last three and two quarters, respectively.
SVAR (SR and LR) as an antecedent indicator of HP?
HP lter yields smoother results than SVAR Maybe HP results can be predicted by the SVAR
Correlation of SVAR(t) and HP(t): 6.1% Correlation of SVAR(t-1) and HP(t): 31.0% Correlation of SVAR(t-2) and HP(t): 26.8% OLS: HP t = 0.69HP t 1 has 46.8% of adj-R 2 OLS: HP t = 0.44SVAR t 1 + 0.67HP t 1 has 54.6% of adj-R 2
Ination and Output Gap Measures

Correlation of quarterly series of ination with output gap measures, from 3Q1997 up to 3Q2013. SVAR SVAR Output Gap HP Cholesky SR SR and LR Free Prices(t) -13,2% -12,1% 18,1% 14,7% Free Prices(t+1) -2,0% -0,1% 31,5% 18,1% Free Prices(t+2) 8,4% 12,1% 41,8% 16,7% Free Prices(t+3) 9,9% 18,4% 39,6% 16,2% Services(t) 1,0% 2,0% 3,0% 10,7% Services(t+1) 3,3% 3,6% 17,2% 10,8% Services(t+2) 5,9% 9,8% 29,7% 11,7% Services(t+3) 9,8% 17,2% 35,2% 15,0%
Phillips Curve Estimation

Quarterly seasonally adjusted ination for free prices, services and core (ex food and regulated prices). Data from 3Q2001 up to 4Q2013. Ination expectations from FOCUS survey. Estimation by OLS.
k
Reduced form: it = 0 it 1 + 1 E t [ t +1 ] +
j ht j +
j =0
Results not signicantly changed by the restriction 0 + 1 = 1.

Information Criteria on a Simple Model for Free Prices

Model for quarterly ination (free prices)
k F F t = 0 t 1 + 1 E t [ t +1 ] +
j h t j +
j =0
Output Gap AIC SIC HQ

R2
SVAR SVAR HP Cholesky SR SR and LR 58.6% 56.4% 65.7% 59.7% 4.42 4.47 4.23 4.39 4.78 4.84 4.60 4.76 4.55 4.60 4.36 4.53
Information Criteria on a Simple Model for Services Ination

Model for quarterly ination (services)
k S S t = 0 t 1 + 1 E t [ t +1 ] +
j ht j +
j =0

R2
SVAR SVAR HP Cholesky SR SR and LR 40.6% 40.5% 39.3% 43.9% 3.24 3.25 3.27 3.19 3.44 3.44 3.46 3.38 3.32 3.32 3.34 3.26
Information Criteria on Core Ination

Model for quarterly ination (ex food and regulated prices)
k N N t = 0 t 1 + 1 E t [ t +1 ] +
j ht j +
j =0

R2
SVAR SVAR HP Cholesky SR SR and LR 74.2% 72.4% 78.3% 75.3% 3.18% 3.25 3.01 3.14 3.55% 3.62 3.38 3.51 3.31% 3.38 3.14 3.27
Phillips Curve analysis

Deviations from Cholesky decomposition with short-run restrictions may yield much better results for tting past ination. The shocks estimated from a SVAR with long run and short run restrictions overperform the shocks estimated by an HP lter in all the 3 tests. Although not indicated for understanding the evolution of services ination, the SVAR with only short run restrictions had a signicantly better performance than the other 3 to predict free and core ination.
HP Filter vs. SVAR

Since the shocks are estimated from an i.i.d. series of residuals, their estimates are not subject to the last observation bias. The estimation uncertainty comes solely from the parameters. If parameters and past observations are xed the series of shocks yield the same results. Therefore, the SVAR leads to an earlier identication of economic shocks.
The HP Filter is designed to smooth the GDP series while the SVAR is designed to estimate shocks.
Uncertainty of Shocks Estimation

0.3 0.2 0.1 0
0.1 5 102
5 102
0.1
It is important to emphasize that great part of this uncertainty was caused by parameter revisions after the shock of the recent global recession.
Probability of Overheated Economy

Since there is uncertainty on the values estimated by the SVAR, we will use the empirical distribution of estimation errors and compute the probability the economy is overheated (O=1). This will be compared to a dummy variable that assumes value 1 if the ination rises (I=1), from one quarter to another. The results are presented in the table below.
P I=1 I=0 O=1 37.5% 22.9% O=0 10.4% 29.2%
Therefore, this simple model guesses right 66.7% of the prices increases or decreases in our sample. Using the core prices (ex food and regulated prices) or the prices of services we obtain very similar results (68.8% and 58.3%, respectively). From 2008Q1 to 2013Q3 this percentage goes to 73.9%.
Stability 2Q2010
102
1.2
0.8 HP Filter SVAR SR 0.6
1Q2010 3Q2010 1Q2011 3Q2011 1Q2012 3Q2012 1Q2013 3Q2013
Stability 3Q2010
102
1.6
1.4
1.2
1 HP Filter 0.8 SVAR SR
2Q2010 4Q2010 2Q2011 4Q2011 2Q2012 4Q2012 2Q2013 3Q2013
Stability 4Q2010
102
1.5
0.5
HP Filter SVAR SR
4Q2010
2Q2011
4Q2011
2Q2012
4Q2012
2Q2013
3Q2013
Stability 1Q2011
102
2
1.5
HP Filter SVAR SR 0.5
4Q2010
2Q2011
4Q2011
2Q2012
4Q2012
2Q2013
3Q2013
Stability 2Q2011
102
2
1.5
HP Filter 0.5 SVAR SR
2Q2011
4Q2011
2Q2012
4Q2012
2Q2013
Stability 3Q2011
102
1.5
0.5
HP Filter SVAR SR
0.5
4Q2011 2Q2012 4Q2012 2Q2013
Stability 4Q2011
1
102
0.5
0.5
HP Filter SVAR SR
4Q2011
2Q2012
4Q2012
2Q2013
Stability 1Q2012
102
0.5
HP Filter SVAR SR
1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013
Stability 2Q2012
102
0.4
0.6
0.8
1.2
HP Filter SVAR SR
1.4
2Q2012
3Q2012
4Q2012
1Q2013
2Q2013
3Q2013
Stability 3Q2012
102
0.5
HP Filter
1.5
SVAR SR
3Q2012
4Q2012
1Q2013
2Q2013
3Q2013
Stability 4Q2012
102
0.5
0.5
1
HP Filter SVAR SR
1.5
4Q2012 1Q2013 1Q2013 2Q2013 2Q2013 3Q2013 3Q2013
Conclusions
The demand shocks estimated by a SVAR can signicantly aggregate information to the HP Filter. The SVAR can provide estimates for the output gap much more stable than the HP Filter does
Some identication strategies explain ination robustly better. This result is similar to previous ndings in the literature: Orphanides and van Norden (1999) and Cayen and van Norden (2002) nd that HP Filter estimates for the output gap are much more sensitive to data revisions than those from other methologies. In some cases negative HP gaps turned into positive ones, specially under economic transitions (it is taking approximately 10 quarters to converge in the last years).
Conclusions
Identication restrictions matter
Dierent identication restrictions can explain better some disaggregate measures of ination than others.
The SVAR estimates seem to anticipate the HP Filter ones. The SVAR estimates seem to respond quickly to monetary policy.
Equations Equilibrium and IRF Conclusion
Phillips Curve
+4 t = 0 t 1 + 1 t 2 +(1 0 1 )E t (t t +1 )+ k1 j 1 =0 k2
j 1 H t j 1 +
j 2 =0
j 2 q t j 2 + u P t
Variable AR(1) AR(2)

H t 3 q t 4
Adj-R 2
Estimates 1.07*** (0.00) -0.27* (0.05) 0.29*** (0.01 ) 0.03*** (0.01) 82.6%
Estimated by GMM HAC (instruments: t 1 , t 2 , t 3 , t 4 , H t 1 , H t 2 , H t 3 , q t 4 ). Data from 2004Q1 to 2013Q2.

IS Curve
f1 f2
H t = c + R r t +
w 1 =1
w 1 H t w 1 +
w 2 =0
w 2H t w 2 +
f3 w 3 =0
w 3 g t w 3 + u H t
Variable
rt H t gt g t 2 H t 2
Adj-R 2
Estimates -0.11*** (0.00) 0.50*** (0.00) 0.13** (0.03) 0.11** (0.04) 0.36*** (0.00) 35.7%
Estimated by GMM HAC (instruments: r t 1 , r t 2 , g t 1 , g t 2 , g t 3 , g t 4 , H t 1 , H t 2 , H t 2 ). Data from 2004Q1 to 2013Q2.

IS Curve (alternative specication)

Ht = c + R r t +
w 1 =1 f1 f2
w 1 H t w 1 +
w 2 =0
w 2H t w 2 +
f3
f4
w 3 g t w 3 +
w 3 =0 w 4 =0
w 4 b t w 4 + u H t
Variable
rt H t g t 1 bt H t 2
Adj-R 2
Estimates -0.11*** (0.00) 0.43*** (0.00) -0.34*** (0.00) 0.47*** (0.00) 0.46*** (0.00) 38.1%
Estimated by GMM HAC (instruments: r t 1 , r t 2 , g t 1 , g t 2 , g t 3 , g t 4 , H t 1 , H t 2 , H t 2 , b t , b t 1 ). Data from 2004Q1 to 2013Q2.

International and Domestic Interest Rates

Credit (mixed)
If the spread between international and national interest rates widens carry-trade becomes more protable (borrowing abroad and lending for the national government). The contrary happens if it shrinks. On the long run the eects may become negative due to capital cost considerations. Capital becomes more expensive and this raises funding costs. If international interest rates go up, the national currency tends to depreciate, having expansionary eects If international interest rates go up, national residents become richier (poorer) if the country is a foreign lender (borrower).
Capital cost (-)
Exchange rate (+) Wealth (mixed)
Expectations
+4 t +4 On the long run: t t +1 = E t (t +1 )
Expectations are adaptive (model 1): Alternative specication (model 2):
+4 t t t E E t (t t +1 ) E t 4 (t 3 ) = (t 3 E t 4 (t 3 )) + u t +1 t +1 t t E E t (t t ) E t 1 (t ) = (t 1 E t 1 (t 1 )) + u t
Variable Model 1 Model 2 Prediction 0.45*** 0.13*** (0.00) (0.00) 2 Adj-R 50.1% 57.1% Estimation by OLS. Data from 2004Q1 to 2013Q2. Only specication 1 was used in the simulations.
Taylor Rule
+ Y H t j ) + u it i t = R i t 1 + (1 R )(i + (t ) + Y H t j + u it i t = 1 i t 1 + 2 i t 2 + (t )
Variable
R 1 2 Y
Baseline 0.95*** (0.00)
Alternative Model 0.87*** (0.00) -0.43*** (0.01) 0.18* (0.05) 0.33** (0.01) 75.0%
Adj-R 2
0.42*** (0.00) 0.53*** (0.00) 95.9%
Estimation by OLS. Data from 2004Q1 to 2013Q2.

Fiscal Policy and Equilibrium Real Interest Rates

Primary Surplus 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 1.0 4.2 3.6 3.0 2.4 1.8 1.1 0.5 -0.1 -0.7 -1.3 -2.0 -2.6 -3.2 -3.8 -4.4 -5.0 -5.7 -6.3 -6.9 -7.5 -8.1 1.5 6.4 5.7 5.1 4.5 3.9 3.3 2.7 2.0 1.4 0.8 0.2 -0.4 -1.1 -1.7 -2.3 -2.9 -3.5 -4.1 -4.8 -5.4 -6.0 US 10Yr Interest Rates (Alternative Model) 2.0 2.5 3.0 3.5 4.0 4.5 8.5 7.9 7.3 6.6 6.0 5.4 4.8 4.2 3.6 2.9 2.3 1.7 1.1 0.5 -0.2 -0.8 -1.4 -2.0 -2.6 -3.2 -3.9 10.6 10.0 9.4 8.8 8.2 7.5 6.9 6.3 5.7 5.1 4.5 3.8 3.2 2.6 2.0 1.4 0.7 0.1 -0.5 -1.1 -1.7 12.8 12.2 11.5 10.9 10.3 9.7 9.1 8.4 7.8 7.2 6.6 6.0 5.4 4.7 4.1 3.5 2.9 2.3 1.6 1.0 0.4 14.9 14.3 13.7 13.1 12.4 11.8 11.2 10.6 10.0 9.3 8.7 8.1 7.5 6.9 6.3 5.6 5.0 4.4 3.8 3.2 2.5 17.0 16.4 15.8 15.2 14.6 14.0 13.3 12.7 12.1 11.5 10.9 10.2 9.6 9.0 8.4 7.8 7.2 6.5 5.9 5.3 4.7 19.2 18.6 17.9 17.3 16.7 16.1 15.5 14.9 14.2 13.6 13.0 12.4 11.8 11.1 10.5 9.9 9.3 8.7 8.0 7.4 6.8 5.0 21.3 20.7 20.1 19.5 18.8 18.2 17.6 17.0 16.4 15.8 15.1 14.5 13.9 13.3 12.7 12.0 11.4 10.8 10.2 9.6 8.9 Baseline Model 8.8 8.3 7.9 7.4 7.0 6.5 6.1 5.6 5.1 4.7 4.2 3.8 3.3 2.9 2.4 2.0 1.5 1.1 0.6 0.2 -0.3
Fiscal Equilibrium
For each real interest rate (r), public debt (b), and natural growth (g) scenario there is primary surplus that stabilizes public debt according to the equation below.
r =
Therefore, this equation and the previous estimates for the real interest rate of equilibrium provide, for each level of public debt, a unique primary surplus and interest rate equilibrium. A 40% level of debt implies a primary surplus of 3% and real interest rates of 9% (US 10Yr Bonds at 4% and real growth at 2.5% yearly).
0.15
s b
+g
0.1
5 102 IS Equilibrium Stable Debt (40%)
4 102
Fiscal Equilibrium
As a consequence, there each point in the IS Equilibrium Curve implies a stable debt level.
1.5
0.5
0 0 1 2 Primary Surplus 3 4 102
Interest Rates Debt
Response of 4Q Ination to Monetary Policy Shock

100bps hike on nominal interest rates during 4Q.
0
0.1
0.2
10
t
20
30
Baseline Alternative
Response of 4Q Ination to Fiscal Policy Shock

100bps hike in the primary decit during 4Q: robust strong scal inuence on ination
0
0.2
0.4
10
t
20
30
Baseline Alternative
Response of 4Q Ination to International Interest Rate Shock

100bps hike in the international interest rates (alternative model)
0.4 0.2 0
0.2
10
t
20
30
Conclusion
Fiscal policy may be an important driver to ination International interest rates matter a lot
The interest-rate spread matters An important part of the recent adjustment in the real interest rates may be due to the international ease on monetary conditions

Estimating The Output Gap: A SVAR Approach: Vinícius Botelho Samuel Pessoa Silvia Matos

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Introduction Output Gap Estimation Small economy model