Measuring output GAP in Lithuania 1997-2007

Abstract

The output gap is well-known theoretical concept which plays an important role in many macro-models related to fiscal and monitory evaluation of country’s economy. When the economy is running an output gap, either positive or negative, it is thought to be running at an inefficient rate as the economy is either overworking or underworking its resources. Economic theory suggests that positive output gap will lead to inflation as production and labour costs rise. The object of the research is the measurement of Lithuania’s output gap by different statistical methods: univariate (Time trend, Hodrick-Prescott filter and Unobserved Components model) and multivariate (Production function). Results are compared identifying differences and similarities between mentioned models.