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The output Gap in chile: Measurement and Evaluation

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Author Info
Rodrigo Fuentes S.
Fabián Gredig U.
Mauricio Larraín E.

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Abstract

This paper estimates potential GDP growth and output gaps for the period 1986-2007 using three different methodologies: (i) production function, (ii) Kalman filter proxy (univariate and multivariate) and (iii) structural VAR . The output gap estimates show a high degree of mutual consistency. The methods suggest that at the beginning of the sample period the economy was overheated with considerably wide positive gaps. From 1993 through the Asian crisis, the gap was positive but small. From the crisis onwards estimates show a negative gap with a mild trend to close, but becomes positive in 2007. To evaluate the different gap measurements, real-time estimates are compared with ex-post estimates in terms of their capacity for forecasting future inflation. For potential GDP growth, the different methods yield similar results. For the full period, trend GDP growth is estimated at around 5.5%. However, significant differences exist across sub-periods, particularly showing a deceleration in the aftermath of the 1999 recession.

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File URL: http://www.bcentral.cl/eng/studies/economia-chilena/2008/ago/v11n2ago2008pp7-30.pdf
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Publisher Info
Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 11 (2008)
Issue (Month): 2 (August)
Pages: 7-30
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Handle: RePEc:chb:bcchec:v:11:y:2008:i:2:p:7-30

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  1. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
  2. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
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  3. Gabriela Contreras M & Pablo García S, 2002. "Estimating Gaps and Trends for the Chilean Economy," Working Papers Central Bank of Chile 165, Central Bank of Chile. [Downloadable!]
  4. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May. [Downloadable!] (restricted)
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  5. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388. [Downloadable!] (restricted)
  6. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April. [Downloadable!] (restricted)
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  7. Rómulo A.Chumacero & Francisco A.Gallego, 2002. "Trends and cycles in real-time," Estudios de Economia, University of Chile, Department of Economics, vol. 29(2 Year 20), pages 211-229, December. [Downloadable!]
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  8. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November. [Downloadable!] (restricted)
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  9. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 97/177, International Monetary Fund.
  10. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
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  11. Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/04, Reserve Bank of New Zealand. [Downloadable!]
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