Measuring a Roller Coaster: Evidence on the Finnish Output Gap

36 Pages Posted: 15 Feb 2006

See all articles by Andreas Billmeier

Andreas Billmeier

International Monetary Fund (IMF) - Middle East and Central Asia Department

Date Written: April 2004

Abstract

The output gapwhich measures the deviation of actual output from its potentialis 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 inflationbut 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.

Keywords: Finland, output gap, potential output, inflation forecasting

JEL Classification: E31, E32, E37

Suggested Citation

Billmeier, Andreas, Measuring a Roller Coaster: Evidence on the Finnish Output Gap (April 2004). IMF Working Paper No. WP/04/57. Available at SSRN: https://ssrn.com/abstract=878880

Andreas Billmeier (Contact Author)

International Monetary Fund (IMF) - Middle East and Central Asia Department ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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