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Output gap and inflation nexus: the case of United Arab Emirates

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  • Mohamed A. Osman
  • Rosmy Jean Louis
  • Faruk Balli

Abstract

Output gap is generally used in assessing both the inflationary pressures and the cyclical position of a nation's economy. However, this variable is not observable and must be estimated. In this article, we accomplish two tasks. First, we estimate the output gap for the United Arab Emirates (UAE) using four different statistical methods. Second, we evaluate to what extent do the fluctuations of output gap, however measured, are a good predictors of inflation in the UAE. This is carried out by comparing the out-of-sample forecasts generated by the output gap-based models to those of the model with alternative indicators and the benchmark models. Interestingly, although the different measures of output gap produce a broadly similar profile of the UAE business cycles, we could not find any statistical evidence that this variable is a useful predictor of inflation in the UAE.

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Bibliographic Info

Article provided by Inderscience Enterprises Ltd in its journal Int. J. of Economics and Business Research.

Volume (Year): 1 (2009)
Issue (Month): 1 ()
Pages: 118-135

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Handle: RePEc:ids:ijecbr:v:1:y:2009:i:1:p:118-135

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Web page: http://www.inderscience.com/browse/index.php?journalID==310

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Keywords: forecasting; forecast accuracy; forecast encompassing; inflation; output gap; United Arab Emirates; UAE.;

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  1. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 583-601, June.
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  9. Lei Lei Song, 2005. "Do underlying measures of inflation outperform headline rates? Evidence from Australian data," Applied Economics, Taylor & Francis Journals, vol. 37(3), pages 339-345.
  10. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
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  12. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, vol. 40(1), pages 15-32, January.
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  14. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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