Estimating the output gap in the Polish economy: the VECM approach

Abstract

This article presents three estimates of the output gap, one using the production function method, and the other two by assessing the long-term product using cointegration relationships (based on the production function and on the hypothesis of permanent income). It also presents an analysis of time-relationships between the estimated output gaps and selected measures of inflation using the covariance of a VAR-type stochastic process. The methods employed yield different estimates of the output gap. The time paths of calculated gaps and the analysis of time relationships (conditional on the existence of relationship described by the Phillips curve and the possibility of using obtained gaps in it) allow the authors to conclude that there’s no inflationary pressure from the aggregate demand in the Polish economy, at least till the end of 2003