Measuring a Roller Coaster: Evidenceon the Finnish Output Gap

April 1, 2004

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Andreas Billmeier. Measuring a Roller Coaster: Evidenceon the Finnish Output Gap, (USA: International Monetary Fund, 2004) accessed September 20, 2024

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

The output gap-which measures the deviation of actual output from its potential-is frequently used as an indicator of slack in an economy. This paper estimates the Finnish output gap using various empirical methods. It evaluates these methods against economic history and each other by a simulated out-of-sample forecasting exercise for Finnish CPI inflation. Only two gap measures, stemming from a frequency domain approach and the Blanchard-Quah decomposition, perform better than the naïve prediction of no change in inflation-but do not improve upon a simple autoregressive forecast. The pronounced volatility of output in Finland makes it particularly difficult to estimate potential output, producing considerable uncertainty about the size (and sign) of the gap.

Subject: Inflation, Labor, Output gap, Potential output, Prices, Production, Total factor productivity, Unemployment rate

Keywords: BQ output gap, Finland, HP estimation approach, Inflation, Inflation forecasting, Output gap, Output gap estimate, Output gap estimation method, Output gap measure, Potential output, Real GDP, Total factor productivity, Unemployment rate, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/057
Stock No:

WPIEA0572004
ISBN:

9781451847802
ISSN:

1018-5941

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