Alternative Estimates of Output Gap for the Argentine Economy

The analysis of the output gap dynamics (the difference between the observed and the non-inflationary potential output) is a widely used tool for structural models employed by central banks. In such models, the output gap is a key variable to explain the dynamics of prices and wages. However, despite its potential as a relevant variable for policy decision-making, both the potential output and the output gap are not directly observable. For this reason, it is necessary to develop a strategy that may allow to improve its estimation using alternative methodologies. This paper describes several methodologies to estimate the potential output and the output gap for the Argentine economy. In particular, a method based on a neoclassical production function is described. Likewise, the paper includes estimates of the potential output constructed through different univariate and multivariate methods such as “State-Space” (Kalman filtering), multivariate Hodrick-Prescott (HP) filter and structural VAR. The final purpose of the paper is to give the Central Bank several tools to estimate such variable, and also evaluate their relative performance by considering their capacity to predict inflation evolution.