Title: Estimating the output gap for the UAE: a production function approach

Authors: Mohamed A. Osman; Rosmy Jean Louis; Faruk Balli

Addresses: Department of Economics and Statistics, University of Dubai, P.O. Box 14143, Dubai, UAE. ' Faculty of Management, Department of Economics and Finance, Vancouver Island University, Building 250 Room 464, 900 Fifth Street, Nanaimo BC V9R 5S5, Canada. ' School of Economics and Finance, Massey University, Private bag 11 222, Palmerston North, New Zealand; Department of Business Administration, Suleyman Sah University, Turkey

Abstract: In this paper, we accomplish two tasks. First, we estimate the output gap for the United Arab Emirates using the production function approach. Secondly, we evaluate to what extent the fluctuations of the output gap are an important indicator of domestic inflation. We find that the output gap profile produced by the production function approach fits reasonably well the UAE's recent economic history in capturing past peaks and troughs. To assess how well the output gap performs in explaining domestic inflation, we used a backward-looking Phillips curve equation. The output gap variable had the expected sign but was statistically insignificant.

Keywords: UAE; United Arab Emirates; output gap; inflation; Hodrick–Prescott filter; production function; Phillips curve.

DOI: 10.1504/IJMEF.2012.044468

International Journal of Monetary Economics and Finance, 2012 Vol.5 No.1, pp.76 - 86

Received: 01 Sep 2010
Accepted: 22 Apr 2011

Published online: 26 Dec 2011 *

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