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Measuring a Roller Coaster

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  • Andreas Billmeier

Abstract

The output gap-which measures the deviation of actual output from its potential-is frequently used as an indicator of slack in an economy. This paper estimates the Finnish output gap using various empirical methods. It evaluates these methods against economic history and each other by a simulated out-of-sample forecasting exercise for Finnish CPI inflation. Only two gap measures, stemming from a frequency domain approach and the Blanchard-Quah decomposition, perform better than the naïve prediction of no change in inflation-but do not improve upon a simple autoregressive forecast. The pronounced volatility of output in Finland makes it particularly difficult to estimate potential output, producing considerable uncertainty about the size (and sign) of the gap.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/57.

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Length: 36
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/57

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Keywords: Production; Economic forecasting; unemployment; unemployment rate; forecasting; statistics; rate of unemployment; natural rate of unemployment; time series; cointegration; statistical measures; equation; arithmetic; sample bias; linear trend; correlation; nairu; autocorrelation; correlations; descriptive statistics; employment; mean square; financial statistics; standard deviations; statistical methods; statistic; econometrics; prediction; parameter value; functional form; high unemployment; full-employment; time ? series; number of regressors; rising unemployment; official unemployment rate; sensitivity analysis; estimation period; sample sizes; total labor force; vector autoregression; full employment; estimation procedure; computation; time series analysis; standard deviation; polynomial; finite sample; cyclical unemployment; orthogonality; estimation technique; empirical methods;

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References

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  1. Fabio Scacciavillani & Phillip Swagel, 1999. "Measures of Potential Output," IMF Working Papers 99/96, International Monetary Fund.
  2. repec:fth:bfsefi:6/98 is not listed on IDEAS
  3. Francisco Nadal-De Simone & Luc Everaert, 2003. "Capital Operating Time and total Factor Productivity Growth in France," IMF Working Papers 03/128, International Monetary Fund.
  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.
  5. 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.
  6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  7. Paula De Masi, 1997. "IMF Estimates of Potential Output," IMF Working Papers 97/177, International Monetary Fund.
  8. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388.
  9. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  10. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  11. Farmer, Roger E A, 2000. "Natural Rate Doubts," CEPR Discussion Papers 2426, C.E.P.R. Discussion Papers.
  12. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  13. Todd E. Clark & Michael W. McCracken, 2003. "The predictive content of the output gap for inflation : resolving in-sample and out-of-sample evidence," Research Working Paper RWP 03-06, Federal Reserve Bank of Kansas City.
  14. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CEPR Discussion Papers 4830, C.E.P.R. Discussion Papers.
  15. Fabio Canova, 1994. "Does detrending matter for the determination of the reference cycle and the selection of turning points?," Economics Working Papers 113, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1995.
  16. Angel J. Ubide & Kevin Ross, 2001. "Mind the Gap," IMF Working Papers 01/203, International Monetary Fund.
  17. Jaromir Benes & Papa M'B. P. N'Diaye, 2004. "A Multivariate Filter for Measuring Potential Output and the NAIRU Application to the Czech Republic," IMF Working Papers 04/45, International Monetary Fund.
  18. Brunila, Anne & Hukkinen, Juhana & Tujula, Mika, 1999. "Indicators of the Cyclically Adjusted Budget Balance: The Bank of Finland's Experience," Research Discussion Papers 1/1999, Bank of Finland.
  19. Andreas Billmeier, 2004. "Ghostbusting," IMF Working Papers 04/146, International Monetary Fund.
  20. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  21. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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