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Output gap uncertainty and real-time monetary policy
[journal article]
Abstract Output gap estimates are subject to a wide range of uncertainty owing principally to the difficulty in distinguishing between cycle and trend in real time. We show that country desks tend to overestimate economic slack, especially during recessions, and that uncertainty in initial output gap estimat... view more
Output gap estimates are subject to a wide range of uncertainty owing principally to the difficulty in distinguishing between cycle and trend in real time. 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 based on output dynamics, data quality, and policy frameworks. We also show that for a group of Latin American inflation targeters the prescriptions from monetary policy rules are subject to large changes due to revised output gap estimates. These explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.... view less
Keywords
monetary policy; inflation; business cycle; Brazil; Chile; Colombia; Mexico; Peru; Latin America
Free Keywords
output gap; policy rule; data revisions; real-time; uncertainty; inflation target
Document language
English
Publication Year
2015
Page/Pages
p. 329-358
Journal
Russian Journal of Economics, 1 (2015) 4
ISSN
2618-7213
Status
Published Version; reviewed
Licence
Creative Commons - Attribution-Noncommercial-No Derivative Works 4.0