Most research on monetary policy assumes availability of
information regarding the current state of economy, at the time of the
policy decision. A key challenge for policy-makers is to find indicators
that give a clear and precise signal of the state of the economy in real
time—that is, when policy decisions are actually taken. One of the
indicators used to asses the economic condition is the output gap; and
the estimates of output gap from real time data misrepresents the true
state of economy. So the policy decisions taken on the basis of real
time noisy data are proved wrong when true data become available. Within
this context we find evidence of wrong estimates of output gap in real
time data. This is done by comparing estimates of output gap based on
real time data with that in the revised data. The quasi real time data
are also constructed such that the difference between estimates of
output gap from real time data and that from quasi real time data
reflects data revision and the difference between estimates of output
gap from final data and that from quasi real time data portray other
revisions including end sample bias. Moreover, output gap is estimated
with the help of five methods namely the linear trend method, quadratic
trend method, Hordrick-Prescott (HP) filter, production function method,
and structural vector autoregressive method. Results indicate that the
estimates of output gap in real time data are different from what have
been found in final data but other revisions, compared to data
revisions, are found more significant. Moreover, the output gap measured
using all the methods, except the linear trend method, appropriately
portray the state of economy in the historical context. It is also found
that recessions can be better predicted by real time data instead of
revised data, and final data show more intensity of recession compared
with what has been shown in real time data. JEL Classification: E320
Keywords: Data Uncertainty, Measurement Uncertainty, Output Gap,
Business Cycle, Economic Activity