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I would like to thank Alfredo Cuevas, Claudia Duante and José R. Maria for their very helpful comments on this paper. A special thank you also to Kadir Tanyeri for his help with the model coding.
Nominal interest rate minus one-period ahead inflation expectations
Quarterly data on government revenue, expenditure and interest is seasonally adjusted and then cyclically adjusted using elasticities from Mourre et al (2014). ‘One-off expenditures and revenues are taken from various European Commission country reports.
In reality, the output gap is unobservable, so here ‘error’ means the difference with the current WEO estimate.