Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197863 
Year of Publication: 
2018
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2018-10
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We use a new real-time database for Canada to study various output gap measures. This includes recently developed measures based on models incorporating many variables as inputs (and therefore requiring real-time data for many variables). We analyze output gap revisions and assess the usefulness of these gaps in forecasting total CPI inflation and three newly developed measures of core CPI inflation: CPI-median, CPI-trim and CPI-common. We also study whether labour-input gaps, projected output gaps, and simple combinations of output gaps can add useful information for forecasting inflation. We find that estimates of excess capacity (the extent to which the economy is below potential) were probably too large around the 2008-2009 recession, as they subsequently tended to be revised down. In addition, we find that, when forecasting CPI-common and CPI-trim, some gaps appear to provide information that reduces forecast errors when compared with models that use only lags of inflation. However, forecast improvements are rarely statistically significant. In addition, we find little evidence of the usefulness of output gaps for forecasting inflation measured by total CPI and CPI-median.
Subjects: 
Inflation and prices
Potential output
Econometric and statistical methods
JEL: 
C53
E37
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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