In this paper we compare two model-based measures of the output gap. The first measure,
as proposed by Gali (2011), defines output gap as the difference between actual output
and the output level that would be if the economy operates under a perfectly competitive
market without price or wage stickiness. We used annual data of relevant variables for
Thailand and computed the output gap under this approach. The calculated output gap
for Thailand shows that the Thai economy performs consistently above the potential level,
which is hard to rationalize especially during the period of recession. We then proposed a
different model-based measure of the output gap, which is based on the method of
“business cycle accounting” (Chari et al., 2007). The approach built on the prototype real
business cycle models, which incorporate time-varying wedges that resemble productivity,
labor and investment taxes, and government consumption shocks. As a result, the sources
of business cycle fluctuation can be classified into efficiency, labor, investment, and
government consumption wedges. We carried out a decomposition of real fluctuation
in Thailand and then removed those wedges from the real output series to obtain the
“potential output”, i.e. an output level when all the inefficiencies are removed. The analysis
provides the estimated result of potential output and output gap for the Thai economy.
Under this approach we found a negative output gap, which is opposite to the finding
under Gali’s approach.