Osman, Mohammad and Jean Louis, Rosmy and Balli, Faruk (2008): Output gap and inflation nexus: the case of United Arab Emirates. Published in: International Journal of Economics and Business Research , Vol. 1, No. 1 (January 2009): pp. 118-135.
Download (206kB) | Preview
Output gap is generally used in assessing both the inflationary pressures and the cyclical position of a nation’s economy. However, this variable is not observable and must be estimated. In this paper, we accomplish two tasks. First, we estimate the output gap for the United Arab Emirates (UAE) using four different statistical methods (i.e. the linear method, the Hodrick-Prescott filter, Band-pass filter and the unobserved components model). Second, we evaluate to what extent the fluctuations of output gap, however constructed or measured, are a good predictor of inflation in the UAE. This is carried out by comparing the out-of-sample forecasts generated by the output gap based models to those of the model with alternative indicator, and the benchmark models. Interestingly, although the different measures of output gap produce a broadly similar profile of the UAE business cycles, we could not find any statistical evidence that this variable is a useful predictor of inflation in the UAE.
|Item Type:||MPRA Paper|
|Original Title:||Output gap and inflation nexus: the case of United Arab Emirates.|
|English Title:||Output gap and inflation nexus: the case of United Arab Emirates|
|Keywords:||Output Gap; Inflation; Forecast; Forecast Accuracy; Forecast Encompassing|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications
|Depositing User:||Faruk Balli|
|Date Deposited:||10. Oct 2011 21:44|
|Last Modified:||01. Jun 2015 21:55|
Baxter, M and R. King, 1999, “Measuring Business Cycles: Approximate Band-Pass Filters for Economic Time Series,” Review of Economics and Statistics, 81, 575-93.
Billmeier, A., 2004, “Measuring a Roller Coaster: Evidence on the Finish Output Gap,” IMF Working Paper04/57 (Washington, DC; International Monetary Fund).
Burns, A. and W. C, Mitchell, 1946, Measuring Business Cycles (New York: National Bureau of Economic Research).
Clarida, R., Gali, J., Gertler, M. 1998, “Monetary Policy Rules in Practice: Some International Evidence,” European Economic Review, 42, 1033-1067
Clark, P.K., 1989, “Trend Reversion in Real Output and Unemployment,” Journal of Econometrics, 40, pp. 15-32.
Claus, I. (2000), “Is the Output Gap a Useful Indicator of Inflation,” Reserve Bank of New Zealand, Discussion Paper Series No 2000/05.
Cuñado, Juncal and L. A. Gil-Alaña, (2007), “Tourism in the Canary Islands: Forecasting Using Several Seasonal Time Series Model”, Universidad de Navarra Working Paper N0. 2/07.
De Brouwer, G. 1998, “Estimating Output Gaps”, Reserve Bank of Australia Research Discussion Paper No, 9809.
Diebold, F.X and Roberto S. Mariano, (1995), “Comparing Predictive Accuracy”, Journal of Business and Economic Statistics, Vol. 13, pp. 253 – 263.
Diebold, F.X. and A.S. Senhadji (1996), “The Uncertain Unit Root on GNP: Comment”, American Economic Review, 86(5), pp. 1291-8.
El-Sakka, M.I. and K. H. Ghali, (2005), “The Sources of Inflation in Egypt: A Multivariate Co-integration Analysis”, Review of Middle East Economics and Finance, 3(3), pp257 – 269.
Gerlach, S. and F. Smets (1997), “Output Gaps and Inflation”, Bank for International Settlements mimeo.
Gibbs, D. 1995, “Potential Output: Concepts and Measurements”, Labour Market Bulletin of New Zealand Department of Labour 1, pp. 72-115.
Graff, Michael (2004), “Estimates of the Output Gap in Real Time: How Well Have We Been Doing”, Reserve Bank of New Zealand Discussion Paper DP2004/04
Hamilton, J. D(1994), Time Series Analysis, Princeton University Press, Princeton, NJ.
Harvey, D.I., S.J. Leybourne, and P. Newbold, (1997), “Testing the Equality of Prediction Mean Squared Errors”, International Journal of Forecasting, Vol. 13, pp. 281 – 291.
Hodrick, R.J. and E.C. Prescott, 1997, “Post-War U.S. Business Cycles: An Empirical Investigation,” Journal of Money, Credit, and Banking, 29, 1-16.
International Monetary Fund (1996), “The Rise and Fall of Inflation: Lessons from the Postwar Experience”, World Economic Outlook, October, Chapter VI. Washington, D.C.: International Monetary Fund.
Loungani, P. and Swagel, P. (2001), “Sources of Inflation in Developing Countries”, International Monetary Fund Working Paper 01/198.
Orphanides, Athanasios and Simon van Norden, (2004), “The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time”, CIRANO and CIREQ working paper.
Ramakrishanan, Uma and A. Vamvakidis, (2002), “Forecasting Inflation in Indonesia”, International Monetary Fund Working Paper 02/111.
Ross, K. and A. Ubide (2001), “Mind the Gap: What is the Best Measure of Slack in the Euro Area?”, IM F Working Paper 01/203 Washington D.C
Slacalek, Jiri, (2004), “Forecasting Consumption”, German Institute for Economic Research Working paper.
Slevin, G. (2001), “Potential Output and the Output Gap in Ireland,” Central Bank of Ireland Technical Paper, 5/RT/01
Song, Lei, Lei. (2003), “Do Underlying Measures of Inflation Outperform Headline Rates? Evidence from the Australian Data”, Melbourne Institute Working Paper N0. 29/03.
St-Amant, Pierre and Simon van Norden, (1998), “Meaurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada”, Bank of Canada Technical Paper N0. 79.
Taslim, M. A. and A. Chowdhury. (1995), Macroeconomic Analysis, Sydney: Prentice Hall.
Van Norden, (1995), “Why Is It So Hard to Measure the Current Output Gap”, Bank of Canada mimeo.
Watson, M.W. (1986), “Univariate Detrending Methods with Stochastic Trends”, Journal of Monetary Economics, 18(1), pp. 49-75.