Monitoring the Economy in Real Time: Trends and Gaps in Real Activity and Prices

We propose two specifications of a real-time mixed-frequency semi-structural time series model for evaluating the output potential, output gap, Phillips curve, and Okun’s law for the US. The baseline model uses minimal theory-based multivariate identification restrictions to inform trend-cycle decomposition, while the alternative model adds the CBO’s output gap measure as an observed variable. The latter model results in a smoother output potential and lower cyclical correlation between inflation and real variables but performs worse in forecasting beyond the short term. This methodology allows for the assessment and real-time monitoring of official trend and gap estimates.