Combining Hodrick-Prescott Filtering with a Production Function Approach to Estimate Output Gap

Abstract

The proposed methodology combines two of the most important techniques to estimate output gap: the production function approach and the Hodrick-Prescott .ltering. Three main advantages can be derived from this method: (i) it adds some economic structure to a .filtering method, (ii) it can be easily adapted to incorporate new characteristics into the filter and (iii) it simultaneously produces estimates for potential output and its unobservable components.