Output Gap Uncertainty and Real-Time Monetary Policy

36 Pages Posted: 23 Feb 2015

See all articles by Francesco Grigoli

Francesco Grigoli

International Monetary Fund (IMF)

Alexander Herman

International Monetary Fund (IMF)

Andrew J. Swiston

International Monetary Fund (IMF)

C. Gabriel Di Bella

International Monetary Fund (IMF)

Date Written: January 2015

Abstract

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. This is important given the central role in monetary policy of assessments of economic activity relative to capacity. 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 ex ante based on characteristics like output dynamics, data quality, and policy frameworks. We also show that for a group of Latin American inflation targeters the prescriptions from typical monetary policy rules are subject to large changes due to output gap revisions. These revisions explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.

Keywords: Economic growth, Latin America, Monetary policy, Inflation targeting, Business cycles, Cross country analysis, Time series, Output gap, policy rule, data revisions, real-time, uncertainty, Brazil, Chile, Colombia, Mexico, Peru, business cycle., future, interest, central bank, advanced economies, share, income, central banks, output gaps, market participants, interest rates, volatility, inflation expectations, small economy, emerging economies, small economies, price, future growth, financial crisis, country risk, low-income economies, natural resource, local currency, emerging markets, consumer price index, factors of production, prices, monetary policies, low-income countries, unemployment

JEL Classification: E01, E32, E43, E52

Suggested Citation

Grigoli, Francesco and Herman, Alexander and Swiston, Andrew J. and Di Bella, C. Gabriel, Output Gap Uncertainty and Real-Time Monetary Policy (January 2015). IMF Working Paper No. 15/14. Available at SSRN: https://ssrn.com/abstract=2568589

Francesco Grigoli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexander Herman

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Andrew J. Swiston

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

C. Gabriel Di Bella

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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