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An Inflation‐Predicting Measure of the Output Gap in the Euro Area
Author(s) -
JAROCIŃSKI MAREK,
LENZA MICHELE
Publication year - 2018
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12496
Subject(s) - output gap , inflation (cosmology) , economics , slowdown , econometrics , measure (data warehouse) , bayesian probability , bayesian vector autoregression , monetary economics , monetary policy , macroeconomics , statistics , computer science , mathematics , physics , database , theoretical physics , economic growth
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.