In an economy conducted under an Inflation Targeting regime, the output gap becomes one of the most important variables to guide monetary policy. Defined as the difference between observed and potential or non-inflationary output, the gap is a measure of the state of aggregate demand and, therefore, of inflationary pressures on the economy. However, this relationship might be obscured by supply and price shocks, perhaps more relevant in the case of emerging economies. This paper estimates and evaluates the output gap for Colombia between 1970 and 2003 using a wide array of methods that go from univariate approaches such as Hodrick-Prescott (HP) and Band Pass filters to multivariate or structural methods obtained by the Kalman filter technique or the production function approach. We also include some mixed procedures like the multivariate filter and the prior-consistent filter. The last one takes into account some supply and price shocks observed in the Colombian economy since 1990. An evaluation of the different estimators is made by a simulated out-of sample forecasting exercise. The results show that multivariate structural filters have a better performance than pure mechanical approaches, but the difference is marginal with respect to a prior-consistent HP filter that takes into account supply shocks. In general, the forecasting performance of all the output gaps estimators improves when we re-define core inflation to exclude some price shocks.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number
003310.
Length: 30 Date of creation: 28 Feb 2005 Date of revision: Handle: RePEc:col:000094:003310
Contact details of provider:
For technical questions regarding this item, or to correct its listing, contact: (Norma Judith Paternina).
Related research
Keywords:
Other versions of this item:
References listed on IDEAS 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.: