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Is the output gap a useful indicator of inflation?

One of the main indicators of inflationary pressures used by the Reserve Bank of New Zealand is the output gap. The output gap is not directly observable and estimates have to be inferred from the data. This paper evaluates whether the output gap, however measured, is a good indicator of inflationary pressures in New Zealand. The results suggest that the output gap provides a useful signal to the monetary authority. When the output gap is positive (negative) two times out of three inflation will increase (decrease) in the next quarter and three times out of five it will increase (decrease) the following year.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2000/05.

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Length: 21p
Date of creation: Mar 2000
Date of revision:
Handle: RePEc:nzb:nzbdps:2000/05
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  1. Paul Conway & Ben Hunt, 1997. "Estimating potential output: a semi-structural approach," Reserve Bank of New Zealand Discussion Paper Series G97/9, Reserve Bank of New Zealand.
  2. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
  3. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-61, March.
  4. Weshah Razzak, 1997. "The inflation-output trade-off: Is the Phillips Curve symmetric? A policy lesson from New Zealand," Reserve Bank of New Zealand Discussion Paper Series G97/2, Reserve Bank of New Zealand.
  5. David T. Coe & C. John McDermott, 1997. "Does the Gap Model Work in Asia?," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 59-80, March.
  6. Erwin Diewert & Denis Lawrence, 1999. "Measuring New Zealand’s Productivity," Treasury Working Paper Series 99/05, New Zealand Treasury.
  7. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Koenker, Roger, 1981. "A note on studentizing a test for heteroscedasticity," Journal of Econometrics, Elsevier, vol. 17(1), pages 107-112, September.
  9. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  10. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
  11. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
  12. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-94, September.
  13. Douglas Laxton & Peter B. Clark & David Rose, 1995. "Asymmetry in the U.S. Output-Inflation Nexus: Issues and Evidence," IMF Working Papers 95/76, International Monetary Fund.
  14. Paul Conway & David Frame, 2000. "A spectral analysis of New Zealand output gaps using Fourier and wavelet techniques," Reserve Bank of New Zealand Discussion Paper Series DP2000/06, Reserve Bank of New Zealand.
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