An Inflation-Predicting Measure of the Output Gap in the Euro Area

By Marek Jarociński, M. Lenza. Social Science Research Network, 2018

116 citations recorded by the source corpus.

Using a small Bayesian dynamic factor model of the euro area we estimate the deviations of output from its trend that are consistent with the behavior of inflation. We label these deviations the output gap. In order to pin-down the features of the model, we evaluate the accuracy of real-time inflation forecasts from different model specifications. The version that forecasts inflation best implies that after the 2011 sovereign debt crisis the output gap in the euro area has been much larger than the official estimates. Versions featuring a secular-stagnation-like slowdown in trend growth, and hence a small output gap after 2011, do not adequately capture the inflation developments. JEL Classification: C32, C53, E31, E32, E37

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/a5e9a08f1d4fc665a6be2a4529cb385d6ff65626

Citations in the corpus

• A Model of the Fed's View on Inflation (2017, unknown): “see Mavroeidis et al. (2014) For a review of results using full-information methods to estimate dynamic stochastic general equilibrium (DSGE) models, see An and Schorfheide (2007).”