Too Hot or Too Cold? Estimating the Cyclical Position of the Irish Economy

Thomas Conefrey, David Staunton and Graeme Walsh
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Thomas Conefrey: Central Bank of Ireland
David Staunton: Central Bank of Ireland
Graeme Walsh: Central Bank of Ireland

No 2/EL/24, Economic Letters from Central Bank of Ireland

Abstract: The output gap measures the difference between the current level of output in the economy and what could be produced if all resources were employed at a sustainable level. Amongst a range of indicators, understanding the size of the output gap is useful for assessing wage and inflation developments and for considerations of the appropriate fiscal policy stance. The output gap is unobserved and must be estimated and is therefore subject to uncertainty. This Letter describes, implements and assesses a range of methods for estimating the output gap for Ireland. The results indicate that the output gap turned sharply positive following the economy’s rapid growth in 2022 and 2023. The size of the positive output gap is estimated to have declined in 2024 but the latest estimates indicate that output is above its long-run sustainable level with a risk of overheating.

Date: 2024-12
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