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Output gap in the WAEMU zone: Comparative analysis of estimate by production function, Kalman filter and Bayesian structural VAR

Université Cheikh Anta Diop de Dakar, Sénégal
Laboratoire d’Analyse, de Recherche et d’Étude du Développement
Centre de Recherches Economiques Appliquées
Faculté des Sciences Economiques et de Gestion
ORCID : https://orcid.org/0000-0002-6344-2602

Abstract: The potential output and output gap concepts are important tools for central banks, and in particular the Central Bank of West African States (BCEAO), to forecast inflation in pursuit of their priority objective of inflation control. The choice of a method for estimating inflation is a delicate one. This paper proposes an estimation of potential output by the unobservable component methods, Watson’s (1986) and Kuttner’s (1994) approach, and by an economic modelling method, namely the Bayesian structural VAR. It also proposes a comparison of these different methods with the production function, which is widely used in the literature and recognized as the best method for estimating potential output for WAEMU countries. The results indicate that the different approaches as well as the production function explain the different crisis periods identified within the union. The comparative analysis, against all expectations, reveals that only the output gap obtained by the production function does not explain inflation.

Keywords: output gap, inflation, Kalman filter, Bayesian structural VAR, WAEMU.

JEL classification : E23, E32, E31, C51, O55.

DOI: https://doi.org/10.18559/RIELF.2021.2.4