Measuring Economic Slack in Asia and the Pacific
16 Pages Posted: 6 Oct 2014
Date Written: March 2014
Economic “slack” directly implies the ability for an economy to grow quickly without any necessary reversal in the future. This implication motivates a forecast-based approach to measuring economic slack. Given this approach, estimated output gaps for most of the major economies in Asia and the Pacific display strong asymmetry, with larger negative levels during recessions than positive levels during expansions. The estimated output gaps are also strongly correlated with narrower measures of slack given by the unemployment rate and capacity utilisation when these are available for a given economy. In terms of a Phillips Curve relationship with future inflation, there are important non-linearities and evidence of changes across policy regimes for some of the economies, arguing against imposing a fixed linear Phillips Curve when measuring slack. Finally, the output gaps appear to have important dynamic linkages across many of the economies in the Asia-Pacific region.
Full publication: Globalisation, Inflation and Monetary Policy in Asia and the Pacific
Keywords: output gap, business cycle asymmetry, Phillips Curve, Asia-Pacific economies
JEL Classification: E32, E37
Suggested Citation: Suggested Citation