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Measuring a Roller Coaster: Evidenceon the Finnish Output Gap

  • Andreas Billmeier

The output gap-which measures the deviation of actual output from its potential-is frequently used as an indicator of slack in an economy. This paper estimates the Finnish output gap using various empirical methods. It evaluates these methods against economic history and each other by a simulated out-of-sample forecasting exercise for Finnish CPI inflation. Only two gap measures, stemming from a frequency domain approach and the Blanchard-Quah decomposition, perform better than the naïve prediction of no change in inflation-but do not improve upon a simple autoregressive forecast. The pronounced volatility of output in Finland makes it particularly difficult to estimate potential output, producing considerable uncertainty about the size (and sign) of the gap.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/57.

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Length: 36
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/57
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  1. Todd E. Clark & Michael W. McCracken, 2003. "The predictive content of the output gap for inflation : resolving in-sample and out-of-sample evidence," Research Working Paper RWP 03-06, Federal Reserve Bank of Kansas City.
  2. Jaromir Benes & Papa M'B. P. N'Diaye, 2004. "A Multivariate Filter for Measuring Potential Output and the NAIRU Application to the Czech Republic," IMF Working Papers 04/45, International Monetary Fund.
  3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
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  9. Mikael Apel & Per Jansson, 1999. "System estimates of potential output and the NAIRU," Empirical Economics, Springer, vol. 24(3), pages 373-388.
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  11. Rasi, Chris-Marie & Viikari, Jan-Markus, 1998. "The Time-Varying NAIRU and Potential Output in Finland," Research Discussion Papers 6/1998, Bank of Finland.
  12. Francisco Nadal-De Simone & Luc Everaert, 2003. "Capital Operating Time and total Factor Productivity Growth in France," IMF Working Papers 03/128, International Monetary Fund.
  13. 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.
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  15. Beyer, Andreas & Farmer, Roger E. A., 2002. "Natural rate doubts," Working Paper Series 0121, European Central Bank.
  16. Brunila, Anne & Hukkinen, Juhana & Tujula, Mika, 1999. "Indicators of the Cyclically Adjusted Budget Balance: The Bank of Finland's Experience," Research Discussion Papers 1/1999, Bank of Finland.
  17. Canova, Fabio, 1999. "Does Detrending Matter for the Determination of the Reference Cycle and the Selection of Turning Points?," Economic Journal, Royal Economic Society, vol. 109(452), pages 126-50, January.
  18. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  19. Andreas Billmeier, 2004. "Ghostbusting: Which Output Gap Measure Really Matters?," IMF Working Papers 04/146, International Monetary Fund.
  20. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
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