Economics Letters 80 (2003) 365–371 www.elsevier.com / locate / econbase Estimates of output gaps in four Southeast Asian countries * Carlos C. Bautista College of Business Administration, University of the Philippines, Diliman, Quezon City, Philippines Received 9 December 2002; accepted 12 March 2003 Abstract The output gaps derived for four countries using a generalized Hamilton model are compared with conventional output gap estimates. Further research is needed to explain why the output gap identifies crisis episodes as slowdowns instead of recessions in some countries.  2003 Elsevier B.V. All rights reserved. Keywords: Asian crisis; Generalized Hamilton; Markov regime-switching; Output gap; Stochastic trend JEL classification: E32 1. Output gap measurement The output gap, defined as the excess of actual output over potential output, is one of the main components of models of price determination based on the Phillips curve and is often used as an argument in monetary policy reaction functions (see, for example, Roberts, 1995; Clarida et al., 2000). However, estimates of the output gap are difficult to obtain because potential output is not directly observable. Indeed, some less than satisfactory empirical results obtained for the US economy using such estimates are a reflection of these difficulties. Because of this problem, several methods have been proposed to obtain reasonable estimates of potential output. One of the earliest (and simplest) methods of arriving at potential output is through a decomposi- tion of output data into cyclical and deterministic linear trend components using OLS. The latter is taken as a measure of potential output. The trend can also be specified as linear-quadratic to capture breaks in an otherwise smooth linear trend. By construction, potential output derived from these methods is unaffected by shocks. This is seen as the main limitation of these methods. The Hodrick–Prescott filter is another useful method that also allows trend growth to vary over time and *Tel.: 163-2-928-4571; fax: 163-2-920-7990. E-mail addresses: bautista@up.edu.ph (C.C. Bautista), http: / / www.up.edu.ph / |cba / bautista (C.C. Bautista). 0165-1765 / 03 / $ – see front matter  2003 Elsevier B.V. All rights reserved. doi:10.1016 / S0165-1765(03)00116-2