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The output Gap in chile: Measurement and Evaluation

  • Rodrigo Fuentes S.
  • Fabián Gredig U.
  • Mauricio Larraín E.

This paper estimates potential GDP growth and output gaps for the period 1986-2007 using three different methodologies: (i) production function, (ii) Kalman filter proxy (univariate and multivariate) and (iii) structural VAR . The output gap estimates show a high degree of mutual consistency. The methods suggest that at the beginning of the sample period the economy was overheated with considerably wide positive gaps. From 1993 through the Asian crisis, the gap was positive but small. From the crisis onwards estimates show a negative gap with a mild trend to close, but becomes positive in 2007. To evaluate the different gap measurements, real-time estimates are compared with ex-post estimates in terms of their capacity for forecasting future inflation. For potential GDP growth, the different methods yield similar results. For the full period, trend GDP growth is estimated at around 5.5%. However, significant differences exist across sub-periods, particularly showing a deceleration in the aftermath of the 1999 recession.

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File URL: http://www.bcentral.cl/eng/studies/economia-chilena/2008/ago/v11n2ago2008pp7-30.pdf
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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 11 (2008)
Issue (Month): 2 (August)
Pages: 7-30

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Handle: RePEc:chb:bcchec:v:11:y:2008:i:2:p:7-30
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  1. Francisco Gallego & Norman Loayza, 2002. "The Golden Period for Growth in Chile: Explanations and Forecasts," Working Papers Central Bank of Chile 146, Central Bank of Chile.
  2. Rómulo A. Chumacero & Francisco A. Gallego, 2001. "Trends and Cycles in Real-Time," Working Papers Central Bank of Chile 130, Central Bank of Chile.
  3. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  4. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  5. Gabriela Contreras M & Pablo García S, 2002. "Estimating Gaps and Trends for the Chilean Economy," Working Papers Central Bank of Chile 165, Central Bank of Chile.
  6. 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.
  7. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  8. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  9. Kenneth D. West & Todd Clark, 2006. "Approximately Normal Tests for Equal Predictive Accuracy in Nested Models," NBER Technical Working Papers 0326, National Bureau of Economic Research, Inc.
  10. Michael Graff, 2004. "Estimates of the output gap in real time: how well have we been doing?," Reserve Bank of New Zealand Discussion Paper Series DP 2004/04, Reserve Bank of New Zealand.
  11. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  12. Alberto Musso & Thomas Westermann, 2005. "Assessing potential output growth in the euro area - a growth accounting perspective," Occasional Paper Series 22, European Central Bank.
  13. F. OğunC & D. Ece, 2004. "Estimating the output gap for Turkey: an unobserved components approach," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 177-182.
  14. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388.
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