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Output gap and inflation in the EU

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Author Info
W. Bolt
P.J.A. van Els

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Abstract

Output gaps for 11 EU-countries, the US and Japan are constructed based on measures of potential output derived from a CES production technology. This technology accommodates differences in substitution elasticities between countries. Indeed, the empirical evidence shows that real wage elasticities of labour demand differ widely across countries. The output gaps constructed turn out to explain movements in inflation in a statistically significant way. Moreover, an aggregate European output gap significantly preceeds inflation in the EU-countries individually as well as aggregate European inflation. These findings imply that an aggregate European output gap is a sensible indicator for inflation to be considered in the policy preparation process at the ECB.

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Publisher Info
Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 550.

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Date of creation: 1998
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Handle: RePEc:dnb:wormem:550

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Related research
Keywords: output gap; potential output; inflation; Phillips curve [[120]order];

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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.:
  1. Raymond Torres & John P. Martin, 1989. "Potential Output in the Seven Major OECD Countries," OECD Economics Department Working Papers 66, OECD, Economics Department. [Downloadable!]
  2. 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.
  3. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Rasi, Chris-Marie & Viikari, Jan-Markus, 1998. "The Time-Varying NAIRU and Potential Output in Finland," Research Discussion Papers 6/1998, Bank of Finland. [Downloadable!]
  5. Rasi, C.M. & Viikari, J.M., 1998. "The Time-Varying NAIRU and Potential Output in Finland," Bank of Finland - Studies in Economics and Finance 6/98, Bank of Finland. Research Department..
  6. Gordon, Robert J, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter. [Downloadable!] (restricted)
    Other versions:
  7. Cara S. Lown & Robert W. Rich, 1997. "Is there an inflation puzzle?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-77. [Downloadable!]
    Other versions:
  8. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678. [Downloadable!] (restricted)
  9. Staiger, Douglas & Stock, James H & Watson, Mark W, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter. [Downloadable!] (restricted)
  10. Douglas Laxton & Guy Debelle, 1996. "Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States," IMF Working Papers 96/111, International Monetary Fund.
  11. Gerlach, Stefan & Smets, Frank, 1999. "Output gaps and monetary policy in the EMU area1," European Economic Review, Elsevier, vol. 43(4-6), pages 801-812, April. [Downloadable!] (restricted)
  12. Gordon de Brouwer, 1998. "Estimating Output Gaps," RBA Research Discussion Papers rdp9809, Reserve Bank of Australia. [Downloadable!]
  13. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February. [Downloadable!] (restricted)
  14. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD, Economics Department. [Downloadable!]
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  16. Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York. [Downloadable!]
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  17. Jørgen Elmeskov, 1993. "High and Persistent Unemployment: Assessment of the Problem and Its Causes," OECD Economics Department Working Papers 132, OECD, Economics Department. [Downloadable!]
  18. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
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Cited by:
(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. Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach," DEGIT Conference Papers c009_030, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
    Other versions:
  2. Schumacher, Christian, 2000. "Forecasting Trend Output in the Euro Area," Discussion Paper Series 26245, Hamburg Institute of International Economics. [Downloadable!]
    Other versions:
  3. Yvonne Adema, 2004. "A Taylor Rule for the Euro Area Based on Quasi-Real Time Data," DNB Staff Reports (discontinued) 114, Netherlands Central Bank. [Downloadable!]
    Other versions:
  4. Ewing, Bradley T. & Seyfried, William L, 2003. "Modeling The Philips Curve: A Time-Varying Volatility Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 3(2). [Downloadable!]
  5. Odile Chagny & Jörg Döpke, 2001. "Measures of the Output Gap in the Euro-Zone: An Empirical Assessment of Selected Methods," Kiel Working Papers 1053, Kiel Institute for the World Economy. [Downloadable!]
  6. Niek J. Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor and Francis Journals, vol. 35(11), pages 1339-1344, July. [Downloadable!] (restricted)
  7. Dimitz, Maria Antoinette, 2001. "Output Gaps in European Monetary Union. New Insights from Input Augmentation in the Technological Progress," Economics Series 102, Institute for Advanced Studies. [Downloadable!]
  8. H.M.M. Peeters, 2000. "Achieving Price Stability in the Euro Zone: Monetary or InflationTargeting?," DNB Staff Reports (discontinued) 43, Netherlands Central Bank. [Downloadable!]
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