Using confidence indicators for the assessment of the cyclical position of the economy

In an inflation targeting regime, the best possible knowledge of demand-side inflationary pressure is of priority importance for monetary policy. In applied macroeconomic models, this is traditionally represented by the actual position of the cyclical component of GDP (the output gap). This study aims at defining a new output gap indicator, which, as opposed to the traditionally employed methods, also relies on direct information concerning the actual utilisation of economic resources. Exploiting such information substantially improves the real-time stability of the output gap estimate. The output gap indicator generated by my method (resource utilisation gap) has convincing predictive power and therefore gives a valid indication of the demand-side inflationary pressure in the real economy. Taking the above into account, the method described below will become a useful additional tool to support decision-making in monetary policy in Hungary.