ABSTRACT
GDP-gap is a central concept in macroeconomic policymaking, but its estimation remains far from uncontroversial. A vast literature on the Taylor rule, for example, mostly uses Hodrick-Prescott (HP) filtered series as estimates of GDP-gaps.1 However, this univariate filtering method is likely to cause serious problems in practical policymaking in real time, in particular, mainly concerning the most recent estimates of the sample. As will be shown in Section 3, policymakers using the HP-filtered estimates of GDP-gaps would have perceived that the economy was in recession in 2006 but realized only after the financial crisis that it was actually a boom period.
