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Ghostbusting: Which Output Gap Measure Really Matters?

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  • Mr. Andreas Billmeier

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.

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  • Mr. Andreas Billmeier, 2004. "Ghostbusting: Which Output Gap Measure Really Matters?," IMF Working Papers 2004/146, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2004/146
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