{
  "title": "The Negative Mean Output Gap",
  "publication": "IMF Working Papers, August 23, 2019",
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  "summary": "We argue that in an economy with downward nominal wage rigidity, the output gap is negative on average. Because it is more difficult to cut wages than to increase them, firms reduce employment more during downturns than they increase employment during expansions.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Authors: Shekhar Aiyar, Simon Voigts\n- Publication date: August 23, 2019\n- Core claim: In an economy with downward nominal wage rigidity, the output gap is negative on average.\n- 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.\n- Demonstration: Shown in a simple New Keynesian model with asymmetric wage adjustment costs.\n- 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."
    },
    {
      "heading": "Model and mechanism",
      "content": "- Framework: Simple New Keynesian model with asymmetric wage adjustment costs.\n- Asymmetry emphasized: Downward nominal wage rigidity makes wage cuts harder than wage increases.\n- Labor response asymmetry: Firms reduce employment more in downturns than they raise it in expansions, generating a negative mean output gap."
    },
    {
      "heading": "Implications for output gap estimation",
      "content": "- Benchmarking: The model's output gap is used as a benchmark to evaluate estimation methods.\n- Systematic bias: Common methods assume a zero mean for the output gap and therefore produce biased estimates when the true mean is negative.\n- Severity in recessions: The bias is especially large in deep recessions, leading to severe underestimation of potential output."
    },
    {
      "heading": "Policy-relevant points",
      "content": "- Monetary policy: Misestimation of the output gap (biased toward zero mean) can distort assessments of slack and inflationary pressure.\n- Fiscal policy: Underestimation of potential output in deep recessions can affect the perceived scale of output shortfalls and fiscal responses.\n- 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."
    },
    {
      "heading": "Key statistics and identifiers (verbatim)",
      "content": "- Pages: 24\n- Volume: 2019\n- Issue: 183\n- Series: Working Paper No. 2019/183\n- DOI: https://doi.org/10.5089/9781513511740.001\n- Stock No: WPIEA2019183\n- ISBN: 9781513511740\n- ISSN: 1018-5941\n- Accessed date in citation: 9/17/2026\n- 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\n\nIMF Working Paper: \"The Negative Mean Output Gap\" by Shekhar Aiyar and Simon Voigts (August 23, 2019).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2019/08/23/the-negative-mean-output-gap-48605"
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    "Authors: Shekhar Aiyar, Simon Voigts",
    "Published: August 23, 2019",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513511740.001",
    "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.",
    "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.",
    "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.",
    "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.",
    "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",
    "**Working Paper**"
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