Abstract
This study introduces a novel and simple method for estimating the real-time output gap using data from Israel's Business Tendency Survey. We develop an index of excess demand or supply, defined as the difference between reported supply and demand constraints. This index is incorporated into a state space model alongside actual output to estimate the output gap. Our findings demonstrate that the derived output gap measure has a positive and statistically significant impact on three key price indicators in Israel: the Consumer Price Index, Producer Price Inflation, and Business Sector Output Prices.
This measure yields promising results, exhibiting explanatory power that compares favorably to several widely-used alternative output gap estimation methods. Furthermore, our output gap measure demonstrates higher real-time robustness with respect to data revisions than the standard univariate method. The proposed approach complements existing methods, providing valuable insights for economic analysis and policy-making by leveraging real-time survey data and capturing businesses' perceptions of economic constraints.
Keywords: Demand and Supply constraints, Output gap, Inflation, Business Tendency Survey.