Ghostbusting: Which Output Gap Measure Really Matters?

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: August 2004

Abstract

This paper investigates various output gap measures in a simple inflation forecasting framework. Reflecting the cyclical position of an economy, an (unobservable) output gap has important implications for economic analysis. I construct and compare common output gap measures for five European countries. Since output above potential reflects domestic inflationary pressures, including a gap could improve the accuracy of autoregressive inflation forecasting. This assertion is tested in a simple simulated out-of-sample forecasting exercise for the period 1990-2002. The main conclusions are that an output gap rarely provides useful information and that there is no single best output gap measure across countries.

Keywords: Output gap, potential output, inflation forecasting

JEL Classification: E31, E32, E37

Suggested Citation

Billmeier, Andreas, Ghostbusting: Which Output Gap Measure Really Matters? (August 2004). IMF Working Paper No. WP/04/146. Available at SSRN: https://ssrn.com/abstract=878971

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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