Mind the Gap : What is the Best Measure of Slack in the Euro Area?

Assessing the magnitude of the output gap is critical to achieving an optimal policy mix. Unfortunately, the gap is an unobservable variable, which, in practice, has been estimated in a variety of ways, depending on the preferences of the modeler. This model selection problem leads to a substantial...

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Main Author: Ubide, Angel J.
Other Authors: Ross, Kevin
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2001, 2001
Series:IMF Working Papers; Working Paper
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
Summary:Assessing the magnitude of the output gap is critical to achieving an optimal policy mix. Unfortunately, the gap is an unobservable variable, which, in practice, has been estimated in a variety of ways, depending on the preferences of the modeler. This model selection problem leads to a substantial degree of uncertainty regarding the magnitude of the output gap, which can reduce its usefulness as a policy tool. To overcome this problem, in this paper we attempt to insert some discipline into this search by providing two metrics-inflation forecasting and business cycle dating-against which different options can be evaluated using aggregated euro-area GDP data. Our results suggest that Gali, Gertler, and Lopez-Salido's (2001) inefficiency wedge performs best in inflation forecasting and production function methodology dominates in the prediction of turning points. If, however, a unique methodology must be selected, the quadratic trend delivers the best overall results
Physical Description:36 p.
ISBN:1451874456
9781451874457