What Do We Talk About When We Talk About Output Gaps?

40 Pages Posted: 5 Jan 2021

See all articles by Jelle Barkema

Jelle Barkema

International Monetary Fund (IMF)

Tryggvi Gudmundsson

International Monetary Fund (IMF)

Mico Mrkaic

International Monetary Fund (IMF)

Date Written: November 2020

Abstract

Estimates of output gaps continue to play a key role in assessments of the stance of business cycles. This paper uses three approaches to examine the historical record of output gap measurements and their use in surveillance within the IMF. Firstly, the historical record of global output gap estimates shows a firm negative skew, in line with previous regional studies, as well as frequent historical revisions to output gap estimates. Secondly, when looking at the co-movement of output gap estimates and realized measures of slack, a positive, but limited, association is found between the two. Thirdly, text analysis techniques are deployed to assess how estimates of output gaps are used in Fund surveillance. The results reveal no strong bearing of output gap estimates on the coverage of the concept or direction of policy advice. The results suggest the need for continued caution in relying on output gaps for real-time policymaking and policy assessment.

JEL Classification: E31, E32, E47, E52, E62, E23, E30, F32

Suggested Citation

Barkema, Jelle and Gudmundsson, Tryggvi and Mrkaic, Mico, What Do We Talk About When We Talk About Output Gaps? (November 2020). IMF Working Paper No. 20/259, Available at SSRN: https://ssrn.com/abstract=3758093

Jelle Barkema (Contact Author)

International Monetary Fund (IMF) ( email )

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

Tryggvi Gudmundsson

International Monetary Fund (IMF) ( email )

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

Mico Mrkaic

International Monetary Fund (IMF) ( email )

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

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