Estimating the output gap for Turkey:: an unobserved components approach

This study specifies a basic univariate and a bivariate unobserved components model to estimate potential output using information from observable aggregates and presents results for the Turkish economy. The first specification used in the study, i.e. univariate approach, decomposes actual output into potential output that follows a random walk with a time-varying potential growth rate and a stationary output gap. The univariate specifications commonly ignore some economic content, which might be relevant for the measurement of the output gap. In this respect, the univariate model is extended by utilizing the relationship between inflation and the output gap, namely the Phillips curve. Whereas both models give similar output gap estimates, signal extraction statistics suggest that incorporating the supply side to the system reduces the parameter uncertainty and the total standard error and improves the gap estimate.