Output Gap Uncertainty and Real-Time Monetary Policy
IMF Working Papers, January 23, 2015
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Bibliographic details
- Authors: Francesco Grigoli, Alexander Herman, Andrew J Swiston, Gabriel Di Bella
- Published: January 23, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498393454.001
Core findings on output gap uncertainty
- 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.
- Country desks tend to overestimate economic slack, especially during recessions.
- 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.
Implications for monetary policy and inflation targeting
- Assessments of economic activity relative to capacity are central to monetary policy; large uncertainty in output gap estimates therefore has important policy implications.
- For a group of Latin American inflation targeters, prescriptions from typical monetary policy rules are subject to large changes due to output gap revisions.
- Output gap revisions explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.
Methodological and empirical notes (as presented)
- The analysis highlights the roles of data revisions and the challenge of distinguishing cycle from trend in real time.
- Predictability tests find only a small share of revisions can be anticipated using observable characteristics such as output dynamics, data quality, and policy frameworks.
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