Ghostbusting: Which Output Gap Measure Really Matters?
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Summary:
This paper investigates various output gap measures in a simple inflation forecasting framework. Reflecting the cyclical position of an economy, an (unobservable) output gap has important implications for economic analysis. I construct and compare common output gap measures for five European countries. Since output above potential reflects domestic inflationary pressures, including a gap could improve the accuracy of autoregressive inflation forecasting. This assertion is tested in a simple simulated out-of-sample forecasting exercise for the period 1990-2002. The main conclusions are that an output gap rarely provides useful information and that there is no single best output gap measure across countries.
Series:
Working Paper No. 2004/146
Subject:
Economic forecasting Inflation Output gap Potential output Unemployment rate
English
Publication Date:
August 1, 2004
ISBN/ISSN:
9781451856675/1018-5941
Stock No:
WPIEA1462004
Pages:
35
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