The Negative Mean Output Gap
IMF Working Papers, August 23, 2019
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Bibliographic details
- Authors: Shekhar Aiyar, Simon Voigts
- Published: August 23, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513511740.001
Summary
- Authors: Shekhar Aiyar, Simon Voigts
- Publication date: August 23, 2019
- Core claim: In an economy with downward nominal wage rigidity, the output gap is negative on average.
- Mechanism: Because it is more difficult to cut wages than to increase them, firms reduce employment more during downturns than they increase employment during expansions.
- Demonstration: Shown in a simple New Keynesian model with asymmetric wage adjustment costs.
- Consequence for estimation: Common output gap estimation methods that assume a zero mean exhibit a systematic bias, particularly large in deep recessions when potential output tends to be most severely underestimated.
Model and mechanism
- Framework: Simple New Keynesian model with asymmetric wage adjustment costs.
- Asymmetry emphasized: Downward nominal wage rigidity makes wage cuts harder than wage increases.
- Labor response asymmetry: Firms reduce employment more in downturns than they raise it in expansions, generating a negative mean output gap.
Implications for output gap estimation
- Benchmarking: The model's output gap is used as a benchmark to evaluate estimation methods.
- Systematic bias: Common methods assume a zero mean for the output gap and therefore produce biased estimates when the true mean is negative.
- Severity in recessions: The bias is especially large in deep recessions, leading to severe underestimation of potential output.
Policy-relevant points
- Monetary policy: Misestimation of the output gap (biased toward zero mean) can distort assessments of slack and inflationary pressure.
- Fiscal policy: Underestimation of potential output in deep recessions can affect the perceived scale of output shortfalls and fiscal responses.
- Measurement caution: Analysts and policymakers should account for the possibility of a negative mean output gap when using standard output gap filters or estimation approaches.
Key statistics and identifiers (verbatim)
- Pages: 24
- Volume: 2019
- Issue: 183
- Series: Working Paper No. 2019/183
- DOI: https://doi.org/10.5089/9781513511740.001
- Stock No: WPIEA2019183
- ISBN: 9781513511740
- ISSN: 1018-5941
- Accessed date in citation: 9/17/2026
- Formatted citation provided: Shekhar Aiyar, and Simon Voigts. "The Negative Mean Output Gap", IMF Working Papers 2019, 183 (2019), accessed 9/17/2026, https://doi.org/10.5089/9781513511740.001
IMF Working Paper: "The Negative Mean Output Gap" by Shekhar Aiyar and Simon Voigts (August 23, 2019).
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