IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Potential output and the output gap in Luxembourg: some alternative methods

  • Paolo Guarda


Registered author(s):

    The output gap is defined as the difference between the observed level of an economy's output and its trend or potential level. In the short term, an economy can produce above its potential level (a positive output gap) through unusually high levels of labour force participation, capacity utilisation, or technical progress. However, a positive output gap tends to generate inflationary pressures on the markets for factors of production. Once inflation accelerates, output will have to fall below its potential level (a negative output gap) to increase available resources and reduce the pressure on prices. Therefore, measures of the output gap are often used in macroeconomic analysis to assess current and future levels of inflationary pressures in the economy. This study reviews several of the many alternative methods of estimating output gaps and applies six of these to annual data for Luxembourg. These different measures of the output gap are then compared and evaluated in terms of their contribution to inflation forecasting. Methods based on unobserved components models tend to do better than simpler, better known methods (i.e. linear trends, the HP filter). Multivariate methods that consider the simultaneous evolution of several different economic variables tend to do better than univariate methods that limit themselves to the output series itself.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 4.

    in new window

    Length: 58 pages
    Date of creation: Jun 2002
    Date of revision:
    Handle: RePEc:bcl:bclwop:bclwp004
    Contact details of provider: Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
    2. Guay, A & St-Amant, P, 1996. "Do Mechanical Filters Provide a Good Approximation of Business Cycles?," Working Papers-Department of Finance Canada 1996-2, Department of Finance Canada.
    3. Sweta Chaman Saxena & Valerie Cerra, 2000. "Alternative Methods of Estimating Potential Output and the Output Gap: An Application to Sweden," IMF Working Papers 00/59, International Monetary Fund.
    4. Dupasquier, Chantal & Guay, Alain & St-Amant, Pierre, 1999. "A Survey of Alternative Methodologies for Estimating Potential Output and the Output Gap," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 577-595, July.
    5. 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.
    6. Campbell, John & Mankiw, Gregory, 1987. "Are Output Fluctuations Transitory?," Scholarly Articles 3122545, Harvard University Department of Economics.
    7. Apel, Mikael & Jansson, Per, 1998. "A Theory-Consistent System Approach for Estimating Potential Output and the NAIRU," Working Paper Series 74, Sveriges Riksbank (Central Bank of Sweden).
    8. Cooley, Thomas F. & Dwyer, Mark, 1998. "Business cycle analysis without much theory A look at structural VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88.
    9. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388.
    10. Pedro Duarte Neves & Susana Botas & Carlos Robalo Marques, 1998. "Estimation of potencial output for the Portuguese economy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    11. W. Bolt & P.J.A. van Els, 2000. "Output Gap and Inflation in the EU," DNB Staff Reports (discontinued) 44, Netherlands Central Bank.
    12. Dimitz, Maria Antoinette, 2001. "Output gaps and technological progress in European Monetary Union," Research Discussion Papers 20/2001, Bank of Finland.
    13. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
    14. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
    15. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 97/177, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bcl:bclwop:bclwp004. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.