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Output gap and inflation in the EU

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Author Info

  • W. Bolt
  • P.J.A. van Els

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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Bibliographic 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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Web page: http://www.dnb.nl/en/
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Related research

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

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References

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  1. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
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  10. Rasi, Chris-Marie & Viikari, Jan-Markus, 1998. "The Time-Varying NAIRU and Potential Output in Finland," Research Discussion Papers 6/1998, Bank of Finland.
  11. Arturo Estrella & Frederic S. Mishkin, 2000. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Working Papers 6518, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Michaelides, Panayotis & Milios, John, 2009. "TFP change, output gap and inflation in the Russian Federation (1994-2006)," Journal of Economics and Business, Elsevier, vol. 61(4), pages 339-352, July.
  2. M. Demertzis & P.J.A. van Els & H.M.M. Peeters, 2002. "EUROMON: De Nederlandsche Bank's Multi-Country Model," WO Research Memoranda (discontinued) 718, Netherlands Central Bank, Research Department.
  3. Aleksejs Melihovs & Gundars Davidsons, 2006. "The Role of Production Progress and Human Capital in the Economic Growth of Latvia," Working Papers 2006/03, Latvijas Banka.
  4. Dainis Stikuts, 2003. "Measuring Output Gap in Latvia," Working Papers 2003/02, Latvijas Banka.
  5. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2004. "Factor substitution and factor augmenting technical progress in the US: a normalized supply-side system approach," Working Paper Series 0367, European Central Bank.
  6. Yvonne Adema, 2004. "A Taylor Rule for the Euro Area Based on Quasi-Real Time Data," DNB Staff Reports (discontinued) 114, Netherlands Central Bank.
  7. Andreas Billmeier, 2009. "Ghostbusting: which output gap really matters?," International Economics and Economic Policy, Springer, vol. 6(4), pages 391-419, December.
  8. Paolo Guarda, 2002. "Potential output and the output gap in Luxembourg: some alternative methods," BCL working papers 4, Central Bank of Luxembourg.
  9. Slevin, Geraldine, 2001. "Potential Output and the Output Gap in Ireland," Research Technical Papers 5/RT/01, Central Bank of Ireland.
  10. Maria Demertzis & Peter van Els & Sybille Grob & Marga Peeters, 2006. "EUROMON: the multi-country model of De Nederlandsche Bank," DNB Occasional Studies 401, Netherlands Central Bank, Research Department.
  11. 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.
  12. Tiwari, Aviral Kumar & Oros, Cornel & Albulescu, Claudiu Tiberiu, 2014. "Revisiting the inflation–output gap relationship for France using a wavelet transform approach," Economic Modelling, Elsevier, vol. 37(C), pages 464-475.
  13. 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.
  14. 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).
  15. Niek Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor & Francis Journals, vol. 35(11), pages 1339-1344.
  16. Peeters, H.M.M., 2000. "The Goldilocks economy of the United States in comparison with Europe: an analysis with EUROMON," MPRA Paper 29633, University Library of Munich, Germany.
  17. H.M.M. Peeters, 1999. "Achieving price stability in the euro zone: Monetary or inflation targeting ?," WO Research Memoranda (discontinued) 589, Netherlands Central Bank, Research Department.

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