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Estimation of the Euro Area Output Gap Using the NAWM

Günter Coenen (), Frank Smets and Igor Vetlov

No 5, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper presents preliminary estimates of the euro area flexible-price output gap using the estimated version of the New Area-Wide Model (NAWM) - a large-scale DSGE model of the euro area developed and maintained by ECB staff. Following a definition of the flexible-price output gap frequently used in the literature, we show that the NAWM-based measure may at times differ quite considerably from more traditional output gap measures and may display fluctuations of larger amplitude. The dynamics of flexible-price output is mainly driven by shocks to technology, whereas fluctuations in the output gap can be attributed equally to supply and demand shocks. We analyse how robust this output gap estimate is with respect to new incoming data and compare it's inflation forecast performance with alternative measures.

Keywords: output gap; DSGE modelling; Bayesian inference; euro area (search for similar items in EconPapers)
JEL-codes: C11 C32 E31 E32 (search for similar items in EconPapers)
Date: 2009-06-02
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