Working Paper: CEPR ID: DP7763
Authors: Massimiliano Marcellino; Alberto Musso
Abstract: This paper provides real time evidence on the usefulness of the euro area output gap as a leading indicator for inflation and growth. A genuine real-time data set for the euro area is used, including vintages of several alternative gap estimates. It turns out that, despite some difference across output gap estimates and forecast horizons, the results point clearly to a lack of any usefulness of real-time output gap estimates for inflation forecasting both in the short term (one-quarter and one-year ahead) and the medium term (two-year and three-year ahead). By contrast, we find some evidence that several output gap estimates are useful to forecast real GDP growth, particularly in the short term, and some appear also useful in the medium run. A comparison with the US yields similar conclusions.
Keywords: Data revisions; Euro area; Inflation forecasts; Output gap; Real GDP forecasts; Real-time data
JEL Codes: E31; E37; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output gap (E23) | inflation (E31) |
| output gap (E23) | GDP growth (O49) |
| autoregressive models (C22) | inflation (E31) |
| output gap (capacity utilization) (E23) | GDP growth (O49) |