Implications for signal extraction from specifying unobserved components (UC) models with correlated or orthogonal innovations have been well investigated. In contrast, the forecasting implications of specifying UC models with different state correlation structures are less well understood.
Dismiss the Gap? A Real-Time Assessment of the Usefulness of Canadian Output Gaps in Forecasting InflationWe use a new real-time database for Canada to study various output gap measures. This includes recently developed measures based on models incorporating many variables as inputs (and therefore requiring real-time data for many variables).