Analyses focus on current issues of particular relevance to Danmarks Nationalbank’s objectives. The analyses may also contain Danmarks Nationalbank’s recommendations. They include our projections for the Danish economy and our assessment of financial stability. Analyses are targeted at people with a broad interest in economic and financial matters.
The output gap in the Danish economy - calculation and assessment
The output gap is an important indicator of the degree of pressure on the economy’s capacity and, by extension, of current inflationary pressure. Danmarks Nationalbank uses the output gap to quantify capacity pressure in the Danish economy, and it is a key input in the preparation of our recommendations for the Government’s fiscal policy. The output gap cannot be measured directly, but must be estimated using economic models. However, the estimates are subject to uncertainty, which is why the final assessment of the output gap also includes knowledge of other relevant factors not captured by the models. The output gap is currently assessed to be slightly positive and lower than the model estimates. This is because the models have underestimated a number of extraordinarily large movements in the Danish economy, including the increase in labour supply.
Key messages
Why is this important?
The output gap is a key element in Danmarks Nationalbank's ongoing monitoring of developments in the Danish economy to fulfil our objective of ensuring stable prices. We use the output gap as a summary statistic for the assessment of capacity pressure, and as input to our fiscal policy recommendations. Danmarks Nationalbank makes recommendations on fiscal policy because, under Denmark's fixed exchange rate policy, the Bank's interest rates are solely used to manage the krone exchange rate. It is therefore important that other areas of economic policy are geared towards ensuring a stable economy.
Main chart
The output gap is assessed to be slightly positive
Note:
Danmarks Nationalbank's official output gap, which includes manual adjustments based on judgements of factors not captured by the models.
Source:
Own calculations.