The output gap and inflation in U.S. data: an empirical note

This paper analyzes the relationship between the output gap and inflation. This study uses a newly proposed flexible data-driven measure of the output gap and finds that such a distance weight-based measure of the ex-ante output gap (WAgap), has a significant and better in-sample relation with inflation in U.S from January, 1948 to August, 2013 compared to a prevalent ex-ante trend-based measure of the output gap. However, this study confirms the literature's conclusion that finding the out-of-sample/real-time predictability for inflation is most challenging, and the WAgap model provides only modest improvement over the benchmark historical mean model.