The output Gap in chile: Measurement and Evaluation

Abstract

This paper estimates potential GDP growth and output gaps for the period 1986-2007 using three different methodologies: (i) production function, (ii) Kalman filter proxy (univariate and multivariate) and (iii) structural VAR . The output gap estimates show a high degree of mutual consistency. The methods suggest that at the beginning of the sample period the economy was overheated with considerably wide positive gaps. From 1993 through the Asian crisis, the gap was positive but small. From the crisis onwards estimates show a negative gap with a mild trend to close, but becomes positive in 2007. To evaluate the different gap measurements, real-time estimates are compared with ex-post estimates in terms of their capacity for forecasting future inflation. For potential GDP growth, the different methods yield similar results. For the full period, trend GDP growth is estimated at around 5.5%. However, significant differences exist across sub-periods, particularly showing a deceleration in the aftermath of the 1999 recession.