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International Economics and Economic Policy

, Volume 6, Issue 4, pp 391–419 | Cite as

Ghostbusting: which output gap really matters?

  • Andreas Billmeier
Original Paper

Abstract

Reflecting domestic demand pressures, the output gap has important implications for economic analysis. This paper assesses the usefulness of four commonly-used gap measures for a small set of European countries. The main results are that the policy implications can be very different depending on the gap measure and that, consequently, care should be exercised when employing any such measure. Moreover the paper investigates in a simple inflation forecasting framework the common assertion that the output gap could improve the forecasting accuracy. For annual observations, however, these measures rarely provide useful information and there is no single best measure across countries.

Keywords

Output gap Potential output Inflation forecasting 

JEL

E31 E32 E37 

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Copyright information

© Springer-Verlag 2009

Authors and Affiliations

  1. 1.Middle East and Central Asia DepartmentInternational Monetary Fund (IMF)WashingtonUSA

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