Bayesian estimation of the output gap for a small open economy: The case of Canada

► We estimate the output gap for Canada on the basis of a permanent-transitory decomposition of output and the exchange rate using an unobserved components model. ► Empirical identification is based on a simple structural model of a small open economy in which transitory exchange rate movements are used to identify the output gap. ► The unobserved components and the structural parameters are jointly estimated using the Kalman filter and Bayesian technique.