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Inflation and real disequilibria

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Mark S Astley
Tony Yates

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Abstract

This paper outlines some problems with the methods often used to construct measures of real 'disequilibria' or 'gaps' (eg the output gap) and to examine their relationship with inflation. It then offers a structural vector autoregression alternative which is used to construct estimates of output, unemployment and capacity utilisation gaps. Gap estimates are constructed by summing the effects of particular structural shocks, where the shocks are identified using long-run restrictions derived from theory. The approach has four main advantages over other methods. First, it uses economics rather than statistics to construct the gaps. Second, the estimates are not contingent upon particular assumptions about the structure of the economy. Third, it does not impose a rigid causal chain running from gaps to inflation. Fourth, it permits the simultaneous construction of several gap measures and the examination of their relationship with inflation in a single framework, so that the three gap measures are internally consistent and can be used to make inferences about the structure of the economy.

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Paper provided by Bank of England in its series Bank of England working papers with number 103.

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan Gottschalk & Willem Van Zandweghe, 2001. "Do Bivariate SVAR Models with Long-Run Identifying Restrictions Yield Reliable Results? The Case of Germany," Kiel Working Papers 1068, Kiel Institute for the World Economy. [Downloadable!]
  2. Jan Gottschalk & Willem Van Zandweghe, 2003. "Do Bivariate SVAR Models with Long-Run Identifying Restrictions Yield Reliable Results? An Investigation into the Case of Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(I), pages 55-81, March. [Downloadable!]
  3. Jennifer V Greenslade & Richard G Pierse & Jumana Saleheen, . "A Kalman filter approach to estimating the UK NAIRU," Bank of England working papers 179, Bank of England. [Downloadable!]
  4. Vincenzo Cassino & Michael Joyce, . "Forecasting inflation using labour market indicators," Bank of England working papers 195, Bank of England. [Downloadable!]
  5. Nicoletta Batini & Jennifer Greenslade, 2003. "Measuring The UK Short-Run NAIRU," Discussion Papers 12, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
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  6. Tor Jacobson & Per Jansson & Anders Vredin & Anders Warne, 2001. "Monetary policy analysis and inflation targeting in a small open economy: a VAR approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(4), pages 487-520. [Downloadable!]
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