Using additional information in estimating the output gap in Peru: A multivariate unobserved component approach

One of the key elements for inflation targeting regime is the right identification of inflationary or disinflationary pressures through the output gap. In this paper we provide an estimation of the Peruvian output gap using a multivariate unobserved component (MUC) model, relying on an explicit short run relation between the output gap and inflation rate (Phillips Curve) and structural restrictions over output dynamics. The results show that the MUC output gap estimate is less sensible to end of sample problems and exhibits closer dynamics with the inflation process than the standard output gap estimates.