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Model-based Measures of Output Gap: Application to the Thai Economy

Author

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  • Vimut Vanitcharearnthum

    (School of Economics, University of the Thai Chamber of Commerce, Bangkok, Thailand)

Abstract

In this paper we compare two model-based measures of the output gap. The first measure, as proposed by Gali (2011), defines output gap as the difference between actual output and the output level that would be if the economy operates under a perfectly competitive market without price or wage stickiness. We used annual data of relevant variables for Thailand and computed the output gap under this approach. The calculated output gap for Thailand shows that the Thai economy performs consistently above the potential level, which is hard to rationalize especially during the period of recession. We then proposed a different model-based measure of the output gap, which is based on the method of “business cycle accounting” (Chari et al., 2007). The approach built on the prototype real business cycle models, which incorporate time-varying wedges that resemble productivity, labor and investment taxes, and government consumption shocks. As a result, the sources of business cycle fluctuation can be classified into efficiency, labor, investment, and government consumption wedges. We carried out a decomposition of real fluctuation in Thailand and then removed those wedges from the real output series to obtain the “potential output”, i.e. an output level when all the inefficiencies are removed. The analysis provides the estimated result of potential output and output gap for the Thai economy. Under this approach we found a negative output gap, which is opposite to the finding under Gali’s approach.

Suggested Citation

  • Vimut Vanitcharearnthum, 2012. "Model-based Measures of Output Gap: Application to the Thai Economy," Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 19(2), pages 50-65, December.
  • Handle: RePEc:aej:apecjn:v:19:y:2012:i:2:p:50-65
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    References listed on IDEAS

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    3. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters, in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press.
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    More about this item

    Keywords

    output gap; potential output; business cycle accounting; DSGE;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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