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Does the Gap Model Work in Asia?

Author

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  • Mr. C. John McDermott
  • Mr. David T. Coe

Abstract

There is considerable evidence from industrial countries that the output gap is an important determinant of inflation. We examine whether the gap model also works in developing, newly industrializing, and industrial Asian economies. Our output gaps are based on a new nonparametric estimation procedure for trend output that does not require an arbitrary specification of the degree to which the data are smoothed. We test simple versions of the gap model in which the change in inflation is related to the output gap, as well as to the money supply and the terms of trade. We conclude that the gap model works very well in almost all of the Asian economies we study.

Suggested Citation

  • Mr. C. John McDermott & Mr. David T. Coe, 1996. "Does the Gap Model Work in Asia?," IMF Working Papers 1996/069, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1996/069
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    Keywords

    WP; gap model; inflation expectation; gap variable; inflation development; calculated output gaps; change in inflation; Output gap; Inflation; Potential output; Monetary base; National income; Asia and Pacific; research strategy; trend output; broad money money supply; estimated output gap;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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