Inside the “Upside Down”: Estimating Ireland’s Output Gap
AbstractThis paper attempts to identify estimates of Ireland’s output gap that are relevant for fiscal policy. In contrast to standard approaches, we focus on measures of domestic economic activity, given its relatively more tax-rich nature. We examine and test various methods based on univariate/multivariate filters and principal components analysis, comparing our estimates with those of the EU Commonly Agreed Methodology. We find that our results are stable; are less complex in structure; are able to explain price and wage inflation; and, most importantly, yield estimates that are more plausible for Ireland.