Output Gap as Indicator of Inflation - Case for Czech Economy

It is generally accepted, that output gap belongs to the main indicators of inflationary pressures and is often used by central banks when executing monetary policy. When output gap is positive, there are inflationary pressures in economy and inflation will rise. In case, that there is negative output gap in economy, inflation will decline. The aim of this paper is to find whether there is relationship between these two variables for Czech economy. To find the answer, two gap models following Coe, McDermott (1997) and Claus (2000a) will be used – with level of the output gap and change in the output gap. All tests confirm, that central bank should use it as indicator of inflation.