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Forecasting inflation with an uncertain output gap

  • Bjørnland, Hilde C.

    (Dept. of Economics, University of Oslo)

  • Brubakk, Leif

    (Norges Bank)

  • Jore, Anne Sofie

    ()

    (Norges Bank)

The output gap (measuring the deviation of output from its potential) is a crucial concept in the monetary policy framework, indicating demand pressure that generates inflation. The output gap is also an important variable in itself, as a measure of economic fluctuations. However, its definition and estimation raise a number of theoretical and empirical questions. This paper evaluates a series of univariate and multivariate methods for extracting the output gap, and compares their value added in predicting inflation. The multivariate measures of the output gap have by far the best predictive power. This is in particular interesting, as they use information from data that are not revised in real time. We therefore compare the predictive power of alternative indicators that are less revised in real time, such as the unemployment rate and other business cycle indicators. Some of the alternative indicators do as well, or better, than the multivariate output gaps in predicting inflation. As uncertainties are particularly pronounced at the end of the calculation periods, assessment of pressures in the economy based on the uncertain output gap could benefit from being supplemented with alternative indicators that are less evised in real time.

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2006/Memo-11-2006.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 11/2006.

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Length: 31 pages
Date of creation: 04 May 2006
Date of revision:
Handle: RePEc:hhs:osloec:2006_011
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Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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