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Output gap and inflation nexus: the case of United Arab Emirates


  • Osman, Mohammad
  • Jean Louis, Rosmy
  • Balli, Faruk


Output gap is generally used in assessing both the inflationary pressures and the cyclical position of a nation’s economy. However, this variable is not observable and must be estimated. In this paper, we accomplish two tasks. First, we estimate the output gap for the United Arab Emirates (UAE) using four different statistical methods (i.e. the linear method, the Hodrick-Prescott filter, Band-pass filter and the unobserved components model). Second, we evaluate to what extent the fluctuations of output gap, however constructed or measured, are a good predictor of inflation in the UAE. This is carried out by comparing the out-of-sample forecasts generated by the output gap based models to those of the model with alternative indicator, and the benchmark models. Interestingly, although the different measures of output gap produce a broadly similar profile of the UAE business cycles, we could not find any statistical evidence that this variable is a useful predictor of inflation in the UAE.

Suggested Citation

  • Osman, Mohammad & Jean Louis, Rosmy & Balli, Faruk, 2008. "Output gap and inflation nexus: the case of United Arab Emirates," MPRA Paper 34006, University Library of Munich, Germany, revised 2009.
  • Handle: RePEc:pra:mprapa:34006

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    References listed on IDEAS

    1. 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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    8. Iris Claus, 2000. "Is the output gap a useful indicator of inflation?," Reserve Bank of New Zealand Discussion Paper Series DP2000/05, Reserve Bank of New Zealand.
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    More about this item


    Output Gap; Inflation; Forecast; Forecast Accuracy; Forecast Encompassing;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications


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