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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.

Suggested Citation

  • W. Bolt & P.J.A. van Els, 1998. "Output gap and inflation in the EU," WO Research Memoranda (discontinued) 550, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:550

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    References listed on IDEAS

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    Cited by:

    1. M. Demertzis & P.J.A. van Els & H.M.M. Peeters, 2002. "EUROMON: De Nederlandsche Bank's Multi-Country Model," WO Research Memoranda (discontinued) 718, Netherlands Central Bank, Research Department.
    2. H.M.M. Peeters, 1999. "Achieving price stability in the euro zone: Monetary or inflation targeting ?," WO Research Memoranda (discontinued) 589, Netherlands Central Bank, Research Department.
    3. Paolo Guarda, 2002. "Potential output and the output gap in Luxembourg: some alternative methods," BCL working papers 4, Central Bank of Luxembourg.
    4. Y. Adema, 2003. "A taylor rule for the euro area based on quasi-real time data," WO Research Memoranda (discontinued) 738, Netherlands Central Bank, Research Department.
    5. Demertzis, Maria & Van Els, Peter & Grob, Sybille & Peeters, Marga, 2006. "EUROMON: The multi-country model of De Nederlandsche Bank," MPRA Paper 28512, University Library of Munich, Germany.
    6. Andreas Billmeier, 2009. "Ghostbusting: which output gap really matters?," International Economics and Economic Policy, Springer, vol. 6(4), pages 391-419, December.
    7. Peeters, H.M.M., 2000. "The Goldilocks economy of the United States in comparison with Europe: an analysis with EUROMON," MPRA Paper 29633, University Library of Munich, Germany.
    8. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2004. "Factor substitution and factor augmenting technical progress in the US: a normalized supply-side system approach," Working Paper Series 367, European Central Bank.
    9. Niek Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor & Francis Journals, vol. 35(11), pages 1339-1344.
    10. Michaelides, Panayotis & Milios, John, 2009. "TFP change, output gap and inflation in the Russian Federation (1994-2006)," Journal of Economics and Business, Elsevier, vol. 61(4), pages 339-352, July.
    11. Michaelides, Panayotis G. & Economakis, George & Milios, John G. & Maroudas, Leonidas & Aggelis, Vassilis, 2005. "Growth, Technological Change and Output Gap in Russia," MPRA Paper 74479, University Library of Munich, Germany.
    12. Tiwari, Aviral Kumar & Oros, Cornel & Albulescu, Claudiu Tiberiu, 2014. "Revisiting the inflation–output gap relationship for France using a wavelet transform approach," Economic Modelling, Elsevier, vol. 37(C), pages 464-475.
    13. Dimitz, Maria Antoinette, 2001. "Output Gaps in European Monetary Union. New Insights from Input Augmentation in the Technological Progress," Economics Series 102, Institute for Advanced Studies.
    14. Slevin, Geraldine, 2001. "Potential Output and the Output Gap in Ireland," Research Technical Papers 5/RT/01, Central Bank of Ireland.
    15. Ewing, Bradley T. & Seyfried, William L, 2003. "Modeling The Philips Curve: A Time-Varying Volatility Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 3(2).
    16. Belegri-Roboli, Athena & Michaelides, Panayotis G., 2005. "The Basic Characteristics of the Regional Department of Attica and Estimates of Potential Output and Potential Labour," MPRA Paper 74452, University Library of Munich, Germany.
    17. Aleksejs Melihovs & Gundars Davidsons, 2006. "The Role of Production Progress and Human Capital in the Economic Growth of Latvia," Working Papers 2006/03, Latvijas Banka.
    18. Dainis Stikuts, 2003. "Measuring Output Gap in Latvia," Working Papers 2003/02, Latvijas Banka.
    19. Belegri-Roboli, Athena & Demertzi, Aggeliki & Markaki, Maria & Michaelides, Panayotis G., 2011. "Labour Gap, Output Gap and Inflation by Economic Sector: The case of Greece and the Peloponnese Region (2000-2007)," MPRA Paper 74446, University Library of Munich, Germany.

    More about this item


    output gap; potential output; inflation; Phillips curve [[120]order];

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


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