Adaptive Least Squares: Application to Iran Output Gap



 This paper estimates the long term trend in Iran real GDP using a new econometric technique, Adaptive Least Squares (ALS). ALS is a special case of the Kalman Filter that allows for a time varying parameter model to be estimated relatively easily. The estimated trend is then used to estimate the output gap. According to results, coefficients of gaps in models with gap, are not significantly different from zero, thereupon model with intercept and trend and without any gaps have been tested.
The output gap estimation that has been provided in this paper can be used in monetary policies. The comparison of results of ALS, OLS and HP filter shows that the ALS method provides a better estimate.