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Forecasting inflation with an uncertain output gap

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Abstract

The output gap is a crucial concept in the monetary policy framework, indicating demand pressure that generates inflation. However, its definition and estimation raise a number of theoretical and empirical questions. This paper evaluates a series of univariate and multivariate methods for extracting the output gap in Norway, and compares their value added in predicting inflation. We find that models including the output gap have better predictive power than models based on alternative indicators, and they forecast significantly better than simple benchmark models. Furthermore multivariate measures of the output gap perform better than the univariate gaps.

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Authors and Affiliations

  1. Department of Economics, Norwegian School of Management (BI), Nydalsveien 37, 0442, Oslo, Norway

    Hilde C. Bjørnland

  2. Norges Bank, Oslo, Norway

    Hilde C. Bjørnland, Leif Brubakk & Anne Sofie Jore

Authors
  1. Hilde C. Bjørnland
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  2. Leif Brubakk
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  3. Anne Sofie Jore
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Correspondence to Hilde C. Bjørnland.

Additional information

Comments from two anonymous referees, Q. Farooq Akram, Tommy Sveen, Ken West, Fredrik Wulfsberg and seminar participants in Norges Bank are gratefully acknowledged. All mistakes remain our own. The views expressed are those of the authors and do not necessarily represent those of Norges Bank.

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Bjørnland, H.C., Brubakk, L. & Jore, A.S. Forecasting inflation with an uncertain output gap. Empir Econ 35, 413–436 (2008). https://doi.org/10.1007/s00181-007-0165-y

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  • DOI: https://doi.org/10.1007/s00181-007-0165-y

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