Ghostbusting

Abstract

This paper investigates various output gap measures in a simple inflation forecasting framework. Reflecting the cyclical position of an economy, an (unobservable) output gap has important implications for economic analysis. I construct and compare common output gap measures for five European countries. Since output above potential reflects domestic inflationary pressures, including a gap could improve the accuracy of autoregressive inflation forecasting. This assertion is tested in a simple simulated out-of-sample forecasting exercise for the period 1990-2002. The main conclusions are that an output gap rarely provides useful information and that there is no single best output gap measure across countries.Production;Economic forecasting;inflation, forecasting, statistics, statistic, inflationary pressures, monetary policy, prediction, correlations, time series, equation, wage inflation, inflation forecasts, monetary economics, actual inflation, mean square, inflation rate, econometrics, inflation targeting, correlation, aggregate demand, functional form, standard deviation, sample bias, financial statistics, sample size, predictability, autocorrelation, forecasting inflation, price level, high inflation, probability, average inflation, outlier, probability model, number of regressors, arithmetic, standard errors, descriptive statistic, survey, estimation period, outliers, statistical test, sampling, statistical significance, predictions, descriptive statistics, computation, terms of trade, sample mean, absolute error, statistical methods, significance levels, monetary ? policy, statistical measures, orthogonality, minimization