Errors in the Measurement of the Output Gap and the Design of Monetary Policy

Posted: 12 Dec 1999

See all articles by Athanasios Orphanides

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Richard D. Porter

Federal Reserve Bank of Chicago

David Reifschneider

Federal Reserve Board - Division of Research and Statistics

Robert J. Tetlow

Board of Governors of the Federal Reserve System

Frederico Finan

affiliation not provided to SSRN

Date Written: August 26, 1999

Abstract

We exploit data on historical revisions to real-time estimates of the output gap to examine the implications of measurement error for the design of monetary policy, using the Federal Reserve's model of the U.S. economy, FRB/US. Measurement error brings about a substantial deterioration in economic performance, although the problem can be mitigated somewhat by reducing the coefficient on the output gap in policy rules. We also show that it is usually optimal to place some weight on the level of the output gap in the conduct of policy, but under extreme conditions it may be preferable to focus on output growth.

JEL Classification: E52, E58

Suggested Citation

Orphanides, Athanasios and Porter, Richard D. and Reifschneider, David and Tetlow, Robert J. and Finan, Frederico, Errors in the Measurement of the Output Gap and the Design of Monetary Policy (August 26, 1999). FEDS Working Paper No. 99-45, Available at SSRN: https://ssrn.com/abstract=186888

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA
Malaysia

Richard D. Porter (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

David Reifschneider

Federal Reserve Board - Division of Research and Statistics ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2941 (Phone)

Robert J. Tetlow

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Frederico Finan

affiliation not provided to SSRN

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