Inflation and excess demand
Let pt be (the log) of CPI, yt denotes (the log of) output in the selected country’s economy (fixed prices), and yt* is the log of a measure of potential output (equilibrium growth path) for the economy. Assume that the following simple relationship holds between the annual rate of CPI growth, pt, and “output gap” measured by the (log) difference (yt - yt*).
What is the interpretation of the “output gap” in words?
Read and calculate necessary variables in PcGive/Eviews/STATA data file
Formulate and estimate the model using any appropriate methodology.
Consider alternative model specifications from the literature.
Interpret the models.
Compare the forecast performance of the given and rival model (Root Mean Square Errors).
Note: Submit this assignment (online) in a publishable format i.e.
Introduction of the topic (after reading few relevant articles/books)
Data & Methodology
Rival Models in the literature (at least one models)
Empirical Results (it includes the rival models as well)
References (APA Style)