Does the Gap Model Work in Asia?

There is considerable evidence from industrial countries that the output gap is an important determinant of inflation. This paper examines whether the gap model also works in developing, newly industrializing, and industrial Asian economies. The output gaps are based on a nonparametric estimation procedure for trend output that does not require an arbitrary specification of the degree to which the data are smoothed. Simple versions of the gap model are tested in which the change in inflation is related to the output gap, as well as to the money supply. The paper concludes that the gap model works very well in almost all the Asian economies studied.