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Mind the Gap

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  • Angel J. Ubide
  • Kevin Ross

Abstract

Assessing the magnitude of the output gap is critical to achieving an optimal policy mix. Unfortunately, the gap is an unobservable variable, which, in practice, has been estimated in a variety of ways, depending on the preferences of the modeler. This model selection problem leads to a substantial degree of uncertainty regarding the magnitude of the output gap, which can reduce its usefulness as a policy tool. To overcome this problem, in this paper we attempt to insert some discipline into this search by providing two metrics-inflation forecasting and business cycle dating-against which different options can be evaluated using aggregated euro-area GDP data. Our results suggest that Gali, Gertler, and Lopez-Salido''s (2001) inefficiency wedge performs best in inflation forecasting and production function methodology dominates in the prediction of turning points. If, however, a unique methodology must be selected, the quadratic trend delivers the best overall results.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/203.

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Length: 36
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/203

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Citations

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Cited by:
  1. Moisa Altar & Ciprian Necula & Gabriel Bobeica, 2009. "A Robust Assessment of the Romanian Business Cycle," Advances in Economic and Financial Research - DOFIN Working Paper Series 28, Bucharest University of Economics, Center for Advanced Research in Finance and Banking - CARFIB.
  2. Duarte, Agustin & Venetis, Ioannis A. & Paya, Ivan, 2005. "Predicting real growth and the probability of recession in the Euro area using the yield spread," International Journal of Forecasting, Elsevier, vol. 21(2), pages 261-277.
  3. Isabell Koske & Nigel Pain, 2008. "The Usefulness of Output Gaps for Policy Analysis," OECD Economics Department Working Papers 621, OECD Publishing.
  4. Andreas Billmeier, 2004. "Ghostbusting," IMF Working Papers 04/146, International Monetary Fund.
  5. Osman, Mohammad & Jean Louis, Rosmy & Balli, Faruk, 2008. "Output gap and inflation nexus: the case of United Arab Emirates," MPRA Paper 34006, University Library of Munich, Germany, revised 2009.
  6. Moisa, Altar & Necula, Ciprian & Bobeica, Gabriel, 2010. "Estimating Potential GDP for the Romanian Economy. An Eclectic Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 5-25, September.
  7. Andreas Billmeier, 2004. "Measuring a Roller Coaster," IMF Working Papers 04/57, International Monetary Fund.
  8. Hjelm, Göran & Jönsson, Kristian, 2010. "In Search of a Method for Measuring the Output Gap of the Swedish Economy," Working Paper 115, National Institute of Economic Research.
  9. Grech, Aaron George, 2013. "Adapting the Hodrick-Prescott Filter for Very Small Open Economies," MPRA Paper 48803, University Library of Munich, Germany.
  10. Antonio Paradiso & Saten Kumar & B. Bhaskara Rao, 2013. "A New Keynesian IS curve for Australia: is it forward looking or backward looking?," Applied Economics, Taylor & Francis Journals, vol. 45(26), pages 3691-3700, September.

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