Output Gap Uncertainty and Real-Time Monetary Policy

By Francesco Grigoli, Alexander Herman, Andrew J Swiston, Gabriel Di Bella

January 23, 2015

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Francesco Grigoli, Alexander Herman, Andrew J Swiston, and Gabriel Di Bella. Output Gap Uncertainty and Real-Time Monetary Policy, (USA: International Monetary Fund, 2015) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Output gap estimates are subject to a wide range of uncertainty owing to data revisions and the difficulty in distinguishing between cycle and trend in real time. This is important given the central role in monetary policy of assessments of economic activity relative to capacity. We show that country desks tend to overestimate economic slack, especially during recessions, and that uncertainty in initial output gap estimates persists several years. Only a small share of output gap revisions is predictable ex ante based on characteristics like output dynamics, data quality, and policy frameworks. We also show that for a group of Latin American inflation targeters the prescriptions from typical monetary policy rules are subject to large changes due to output gap revisions. These revisions explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.

Subject: Fiscal policy, Fiscal rules, Inflation, Inflation targeting, Monetary policy, Output gap, Potential output, Prices, Production

Keywords: A. output gap definition, Abs. output gap, Brazil, Business cycle, Chile, Colombia, Data revisions, Fiscal rules, Global, Inflation, Inflation target, Inflation targeting, Mexico, Monetary policy, Output gap, Output gap data, Output gap estimate, Output gap revision, Output gap term, Output gap uncertainty, Peru, Policy rule, Potential output, Real-time, Uncertainty, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/014
Stock No:

WPIEA2015014
ISBN:

9781498393454
ISSN:

1018-5941

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