Which Output Gap Measure Matters for the Arab Gulf Cooperation Council Countries (AGCC): The Overall GDP Output Gap or the Non-Oil Sector Output Gap?

In this paper we estimate the output gaps of the AGCC countries using four different methods that are: the linear trend model, Hodrick-Prescott filter, Band-Pass filter and the unobserved components model. To perform meaningful comparisons, we differentiate between the overall and non-oil output gap and estimate their respective gaps. Several primary conclusions are manifestly noted from our analysis. First, all the different methods but the unobserved components model has produced almost similar results. Second, our results indicate that all the countries in the region have similar business cycles. Third, we find that there is no significant difference between the overall output gap measures and the non-oil output gaps for all the countries in the region. Fourth, the estimated output gaps did not have any explanatory power on domestic inflation for all the countries with the exception of Saudi Arabia and Oman.