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Output gap and inflation in the EU

  • W. Bolt
  • P.J.A. van Els

Output gaps for 11 EU-countries, the US and Japan are constructed based on measures of potential output derived from a CES production technology. This technology accommodates differences in substitution elasticities between countries. Indeed, the empirical evidence shows that real wage elasticities of labour demand differ widely across countries. The output gaps constructed turn out to explain movements in inflation in a statistically significant way. Moreover, an aggregate European output gap significantly preceeds inflation in the EU-countries individually as well as aggregate European inflation. These findings imply that an aggregate European output gap is a sensible indicator for inflation to be considered in the policy preparation process at the ECB.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 550.

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Date of creation: 1998
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Handle: RePEc:dnb:wormem:550
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
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  13. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
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  16. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  17. P Clark & D Laxton, 1997. "Phillips Curves," CEP Discussion Papers dp0344, Centre for Economic Performance, LSE.
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