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Using additional information in estimating output gap in Peru: a multivariate unobserved component approach

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Author Info
Gonzalo Llosa/Shirley Miller

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Abstract

One of the key inputs for inflation targeting regime is the right identification of inflationary or disinflationary pressures. These pressures are usually approximated by the output gap. In this paper we provide an estimation of the Peruvian output gap using a multivariate unobserved component (MUC) model, relying on an explicit short term relation between output gap an inflation rate (Phillips Curve) and structural restrictions over output stochastic dynamics. The estimation is carried out via Kalman Filter technique. The results show that MUC output gap estimate is less sensible to end of sample problems and exhibits more relation with the Peruvian inflation process than other estimates, calculated with the Hodrick-Prescott filter and the production function approach. Furthermore, the diagnostic statistics report that MUC estimate increases out-sample predictive power for inflation. All these features make MUC output gap more reliable than other alternatives.

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 243.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:243

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Related research
Keywords: Output gap; Inflation; unobserved component model;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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References listed on IDEAS
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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. Adrián Armas & Francisco Grippa, 2005. "Fijación de metas inflacionarias en una economía dolarizada: la experiencia de Perú," RES Working Papers 4424, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Adrián Armas & Francisco Grippa, 2005. "Targeting Inflation in a Dollarized Economy: The Peruvian Experience," RES Working Papers 4423, Inter-American Development Bank, Research Department. [Downloadable!]
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