Forecasting inflation with an uncertain output gap

Hilde Christiane Bjørnland (), Leif Brubakk and Anne Sofie Jore

No 2006/02, Working Paper from Norges Bank

Abstract: The output gap (measuring the deviation of output from its potential) is a crucial concept in the monetary policy framework, indicating demand pressure that generates inflation. The output gap is also an important variable in itself, as a measure of economic fluctuations. However, its definition and estimation raise a number of theoretical and empirical questions. This paper evaluates a series of univariate and multivariate methods for extracting the output gap, and compares their value added in predicting inflation. The multivariate measures of the output gap have by far the best predictive power. This is in particular interesting, as they use information from data that are not revised in real time. We therefore compare the predictive power of alternative indicators that are less revised in real time, such as the unemployment rate and other business cycle indicators. Some of the alternative indicators do as well, or better, than the multivariate output gaps in predicting inflation. As uncertainties are particularly pronounced at the end of the calculation periods, assessment of pressures in the economy based on the uncertain output gap could benefit from being supplemented with alternative indicators that are less revised in real time.

Keywords: Output gap; real time indicators; forecasting; Phillips curve (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ets, nep-for, nep-mac and nep-mon
Date: 2006-03-17
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Related works:
Working Paper: Forecasting inflation with an uncertain output gap (2006)
Journal Article: Forecasting inflation with an uncertain output gap (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:bno:worpap:2006_02

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