First of all, the output gap historical series should be constructed. It is usual to start with a
measure of potential output. Several techniques are commonly used to calculate potential output:
(1) the extraction of a linear time trend from historical GDP data; (2) smoothing out the GDP
series through filters like Hodrick-Prescott; (3) Kalman filters; and (4) estimates of production
functions. In the Brazilian case, the linear trend and HP filter were preferred since both produced
similar results. The output gap was then obtained by the difference between actual and potential
GDP, allowing a direct estimate of the “fiscal” IS curve.