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The Forecasting Performance of Real Time Estimates of the Euro Area Output Gap

  • Marcellino, Massimiliano
  • Musso, Alberto

This paper provides real time evidence on the usefulness of the euro area output gap as a leading indicator for inflation and growth. A genuine real-time data set for the euro area is used, including vintages of several alternative gap estimates. It turns out that, despite some difference across output gap estimates and forecast horizons, the results point clearly to a lack of any usefulness of real-time output gap estimates for inflation forecasting both in the short term (one-quarter and one-year ahead) and the medium term (two-year and three-year ahead). By contrast, we find some evidence that several output gap estimates are useful to forecast real GDP growth, particularly in the short term, and some appear also useful in the medium run. A comparison with the US yields similar conclusions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7763.

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Date of creation: Mar 2010
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Handle: RePEc:cpr:ceprdp:7763
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  1. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 583-601, June.
  2. Todd E. Clark & Michael W. McCracken, 2008. "Tests of equal predictive ability with real-time data," Working Papers 2008-029, Federal Reserve Bank of St. Louis.
  3. Tommaso Proietti & Alberto Musso & Thomas Westermann, 2007. "Estimating potential output and the output gap for the euro area: a model-based production function approach," Empirical Economics, Springer, vol. 33(1), pages 85-113, July.
  4. Anthony Garratt & James Mitchell & Shaun P. Vahey, 2009. "Measuring output gap uncertainty," Reserve Bank of New Zealand Discussion Paper Series DP2009/15, Reserve Bank of New Zealand.
  5. Musso, Alberto & Stracca, Livio & van Dijk, Dick, 2007. "Instability and nonlinearity in the euro area Phillips curve," Working Paper Series 0811, European Central Bank.
  6. Jean-Stephane Mesonnier & Jean-Paul Renne, 2004. "A Time Varying Natural Rate of Interest for the Euro Area," Money Macro and Finance (MMF) Research Group Conference 2004 42, Money Macro and Finance Research Group.
  7. Clark, Todd E. & McCracken, Michael W., 2005. "The power of tests of predictive ability in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 124(1), pages 1-31, January.
  8. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Trends and cycles in the euro area: how much heterogeneity and should we worry about it?," Working Paper Series 0595, European Central Bank.
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