Inflation Targeting Under Potential Output Uncertainty

October 1, 2000

Preview Citation

Format: Chicago

Victor Gaiduch, and Benjamin L Hunt. Inflation Targeting Under Potential Output Uncertainty, (USA: International Monetary Fund, 2000) accessed December 21, 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

To achieve their price stability objectives, many monetary authorities use the gap between current and potential output as an indicator of future price pressures. This policy-setting strategy has been criticized because potential output estimates have a high degree of uncertainty. In this paper, estimates of potential output uncertainty in New Zealand are used to examine the output gap’s usefulness. The results suggest that although output gap uncertainty leads to more inflation and output variability, policy based directly and/or indirectly on the output gap leads to better macroeconomic stability than policy based only on observable inflation and output growth.

Subject: Business cycles, Economic growth, Inflation, Inflation targeting, Monetary policy, Output gap, Potential output, Prices, Production

Keywords: Business cycles, Inflation, Inflation targeting, Monetary policy rules, Output gap, Output gap coefficient, Output gap error, Output gap estimation error, Output gap uncertainty, Output-gap error process, Potential output, UCM output gaps, Uncertainty, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/158
Stock No:

WPIEA1582000
ISBN:

9781451857573
ISSN:

1018-5941

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