Ghostbusting: Which Output Gap Measure Really Matters?
AbstractThis paper investigates various output gap measures in a simple inflation forecasting framework. Reflecting the cyclical position of an economy, an (unobservable) output gap has important implications for economic analysis. I construct and compare common output gap measures for five European countries. Since output above potential reflects domestic inflationary pressures, including a gap could improve the accuracy of autoregressive inflation forecasting. This assertion is tested in a simple simulated out-of-sample forecasting exercise for the period 1990-2002. The main conclusions are that an output gap rarely provides useful information and that there is no single best output gap measure across countries.
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Date of creation: 01 Aug 2004
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-22 (All new papers)
- NEP-FOR-2005-10-22 (Forecasting)
- NEP-MAC-2005-10-22 (Macroeconomics)
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