Output gap and inflation nexus: the case of United Arab Emirates

Mohammad Osman, Rosmy Jean Louis and Faruk Balli

MPRA Paper from University Library of Munich, Germany

Abstract: Output gap is generally used in assessing both the inflationary pressures and the cyclical position of a nation’s economy. However, this variable is not observable and must be estimated. In this paper, we accomplish two tasks. First, we estimate the output gap for the United Arab Emirates (UAE) using four different statistical methods (i.e. the linear method, the Hodrick-Prescott filter, Band-pass filter and the unobserved components model). Second, we evaluate to what extent the fluctuations of output gap, however constructed or measured, are a good predictor of inflation in the UAE. This is carried out by comparing the out-of-sample forecasts generated by the output gap based models to those of the model with alternative indicator, and the benchmark models. Interestingly, although the different measures of output gap produce a broadly similar profile of the UAE business cycles, we could not find any statistical evidence that this variable is a useful predictor of inflation in the UAE.

Keywords: Output Gap; Inflation; Forecast; Forecast Accuracy; Forecast Encompassing (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 E37 (search for similar items in EconPapers)
Date: 2008, Revised 2009
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Published in International Journal of Economics and Business Research 1.1(2009): pp. 118-135

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Journal Article: Output gap and inflation nexus: the case of United Arab Emirates (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34006

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