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Estimating the Output Gap for Chile

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  • Rodrigo Fuentes
  • Fabián Gredig
  • Mauricio Larraín

Abstract

In this paper we estimate the output gap and the growth rate of potential output in Chile for the 1986-2005 period, using three different methods: (i) a production function approach, (ii) a Kalman filter approach (univariate and multivariate), and (iii) a structural vector autoregression (SVAR). A high degree of consistency was found among all measures in terms of the sign of the output gap. According to all methods, economic overheating is observed at the beginning of the sample; from 1993 until the Asian Crisis the gap is not very large but is always positive, after the Asian Crisis the gap measures show a smooth tendency to a level close to zero. In order to compare the output gaps generated under the different methodologies, we evaluate the real-time performance of the output gap measures and measure how well the output gap can help forecast future inflation. Regarding the potential output growth, the methods yield broadly similar estimations. Over the complete sample, the average potential growth rate is around 5.6%. However, there seems to be important differences across sub-periods, particularly the growth rate is below the average in the period after the 1999 recession.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 455.

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Date of creation: Dec 2007
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Handle: RePEc:chb:bcchwp:455

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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. Kenneth D. West & Todd Clark, 2006. "Approximately Normal Tests for Equal Predictive Accuracy in Nested Models," NBER Technical Working Papers 0326, National Bureau of Economic Research, Inc.
  3. 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.
  4. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  5. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  6. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
  7. 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.
  8. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  9. F. OğunC & D. Ece, 2004. "Estimating the output gap for Turkey: an unobserved components approach," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 177-182.
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Cited by:
  1. Donal McGettigan & Kenji Moriyama & Jean F Noah Ndela Ntsama & Francois Painchaud & Haonan Qu & Chad Steinberg, 2013. "Monetary Policy in Emerging Markets," IMF Working Papers 13/96, International Monetary Fund.
  2. Felipe Morandé & Mauricio Tejada, 2009. "Sources of Uncertainty in Conducting Monetary Policy in Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 12, pages 451-509 Central Bank of Chile.
  3. Natalia Gallardo & Andrés Sagner, 2010. "Valorización por Arbitraje de Bonos y Acciones Chilenas Mediante el Método de Componentes Principales," Working Papers Central Bank of Chile 557, Central Bank of Chile.
  4. Felipe Morandé L. & Mauricio Tejada G., 2008. "Sources of Uncertainty in Monetary Policy Conduct in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 11(3), pages 45-80, December.

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