Ghostbusting: Which Output Gap Measure Really Matters?

August 1, 2004

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Format: Chicago

Andreas Billmeier. Ghostbusting: Which Output Gap Measure Really Matters?, (USA: International Monetary Fund, 2004) accessed December 26, 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

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.

Subject: Economic forecasting, Inflation, Output gap, Potential output, Unemployment rate

Keywords: Business cycle, Inflation forecast, Output gap estimate, Output gap measure, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/146
Stock No:

WPIEA1462004
ISBN:

9781451856675
ISSN:

1018-5941

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