Ghostbusting : Which Output Gap Measure Really Matters?

Author/Editor:

Andreas Billmeier

Publication Date:

August 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 04/146

Subject:

English

Publication Date:

August 1, 2004

ISBN/ISSN:

9781451856675/1018-5941

Stock No:

WPIEA1462004

Format:

Paper

Pages:

35

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