The output gap captures whether the economy is operating above or below its capacity. It is an important determinant of inflationary pressures, and a key variable from a monetary policy standpoint.1 Unlike many other variables, the output gap is not directly observed— it must be estimated. Estimates are subject to revision as time goes on and more information becomes available. The Bank has decided to publish the estimate of the output gap underlying the forecast in the MPR to increase transparency and bring the indicators we publish on the website in line with what is assumed in the MPR.
Two series are being published:
- The current MPR output gap contains the estimates embedded in the most recently published Monetary Policy Report (MPR): it includes estimates from 1981Q1 to the last quarter for which National Accounts data is available. As more quarters of data become available, this series may be revised.
- The historical MPR output gap is a series containing historical estimates made in real-time, without any revision. The output gap listed for a given quarter is the estimate that was made when the National Accounts data for that quarter became available. This series will not be revised, representing the ‘at the time’ measured status of the output gap.
Publishing the current MPR output gap along with the historical MPR output gap shows how estimates of the gap are uncertain and the extent of revisions through time.
Publishing these output gap estimates complements the following output gap estimates already available on the Bank's website:
- Output gap estimates from two mechanical methodologies that are generally free of judgement or anecdotal evidence (i.e., the Extended Multivariate Filter, EMVF, and the Integrated Framework, IF). For more information, see this staff discussion paper.
- Output gap estimates from the Staff Economic Projections, which includes historical estimates and forecasts prepared by Staff and provided to Governing Council in preparation for monetary policy decisions. These data are published with a five-year lag.2
Aggregate stock-to-sales ratio
Ratio of stocks to final sales of goods, both expressed in current dollars. Learn more
The foreign activity measure
The Bank’s foreign activity measure (FAM) was designed to help predict demand for Canadian non-commodity exports by capturing foreign demand for the goods and services of Canadian firms. In recent years, this measure has become less reliable, potentially because of an evolution in the composition of foreign demand and structural factors, such as lost export capacity and competitiveness challenges. As a result, the Bank has developed two new analytical approaches to help better predict demand for Canadian exports.
Foreign Activity Measure-Input/Output
The first approach, Foreign Activity Measure-Input/Output (FAM-IO), calibrates the weights of various components based on the 2014 World Input-Output Database (produced by the European Commission). This measure more accurately reflects the sources of demand for Canadian goods and services within the United States and globally.
Global Real Activity for Canadian Exports
The second approach, called Global Real Activity for Canadian Exports (GRACE), incorporates information from a large number of international economic indicators to estimate foreign demand for Canadian exports. It uses final expenditure and production variables from the United States and all of Canada’s major trading partners. This allows the determinants of demand for Canada’s goods and services, and their importance, to evolve through time. It can also provide estimates of foreign demand for many subaggregates of exports, allowing for richer analysis.
The two new measures are updated four times a year, concurrently with the publication of the Monetary Policy Report.
For an overview of the Bank’s revised framework of forecasting exports, see the Monetary Policy Report, January 2017, page 15.
A complete description of FAM-IO can be found in Staff Discussion Paper No. 2017-1, “An Improved Equation for Predicting Canadian Non-Commodity Exports.”
A description of GRACE can be found in Staff Discussion Paper No. 2017-02, “Global Real Activity for Canadian Exports: GRACE.”