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Mind the Gap: What is the Best Measure of Slack in the Euro Area?
Author:
Mr. Angel J. Ubide
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Mr. Kevin Ross
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Series:
IMF Working Papers
Volume/Issue:
Volume 2001: Issue 203
Language:
English
Publication Date:
01 Dec 2001
DOI:
https://doi.org/10.5089/9781451874457.001
ISBN:
9781451874457
ISSN:
1018-5941
Pages:
36
Keywords:
WP; business cycle; Phillips curve; production function; Output gaps; unobservable components; business cycles; output gap measure; forecasting exercise; method abbreviation; consumer confidence; detrending method; output gap estimate; inflation performance criteria; Hodrick-Prescott method; non-stationary output gap; BB procedure; inflation regression; inflation dynamics; Output gap; Inflation; Potential output; survey method
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund