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Output Gap (output + gap)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

Does Inflation Targeting Affect the Trade,off Between Output Gap and Inflation Variability?

THE MANCHESTER SCHOOL, Issue 4 2002
Philip Arestis
We utilize a stochastic volatility model to analyse the possible effects of inflation targeting on the trade,off between output gap variability and inflation variability. We find that the adoption of inflation targets (in New Zealand, Australia, Canada, the UK, Sweden and Finland) might result in a more favourable monetary policy trade,off (except in Australia and Finland). This conclusion is reached by comparing, first, the economic performance of targeting countries in the 1980s and the 1990s; and second, the economic performance in the 1990s of targeting and non,targeting countries (the USA, Japan, Switzerland, Germany, France and the Netherlands). We focus on two possible explanations for the performance of the inflation,targeting regime: the relatively high degree of monetary policy transparency, and the presence of a flexible institutional framework. [source]

Output Gaps In Real Time: How Reliable Are They?

THE ECONOMIC RECORD, Issue 252 2005
DAVID GRUEN
The output gap is of central interest to policymakers. Being unobservable, however, its estimation is prone to error, particularly in real time. Errors result from revisions to the data and unavoidable end-point problems associated with the econometric techniques used to estimate it. This is the first study of the seriousness of these problems for Australia. Over a 28-year period, we obtain real-time output-gap estimates which are unbiased and highly correlated with final estimates derived with the latest data and the benefit of hindsight. We conclude that reasonably reliable output gap estimates can be obtained in real time. [source]

Forecasting the Direction of Policy Rate Changes: The Importance of ECB Words

ECONOMIC NOTES, Issue 1-2 2009
Carlo Rosa
This paper evaluates the predictive power of different information sets for the European Central Bank (ECB) interest-rate-setting behaviour. We employ an ordered probit model, i.e. a limited dependent variable framework, to take into account the discreteness displayed by policy rate changes. The results show that the forecasting ability of standard Taylor-type variables, such as inflation and output gap, is fairly low both in-sample and out-of-sample, and is comparable to the performance of the random walk model. Instead by using broader information sets that include measures of core inflation, exchange rates, monetary aggregates and financial conditions, the accuracy of the forecasts about ECB future actions substantially improves. Moreover, ECB rhetoric considerably contributes to a better understanding of its policy reaction function. Finally, we find that that the ECB has been fairly successful in educating the public to anticipate the overall future direction of its monetary policy, but has been less successful in signalling the exact timing of rate changes. [source]

Non-linearities, Business Cycles and Exchange Rates

ECONOMIC NOTES, Issue 3 2008
Menzie D. Chinn
This paper conjoins the disparate empirical literatures on exchange rate models and monetary policy models, with special reference to the importance of output, inflation gaps and exchange rate targets. It focuses in on the dollar/euro exchange rate, and the differential results arising from using alternative measures of the output gap for the US and for the Euro area. A comparison of ,in-sample' prediction against alternative models of exchange rates is also conducted. In addition to predictive power, I also assess the various models' plausibility as economic explanations for exchange rate movements, based on the conformity of coefficient estimates with priors. Taylor rule fundamentals appear to do as well, or better, than other models at the 1-year horizon. [source]

What does Monetary Policy Reveal about a Central Bank's Preferences?

ECONOMIC NOTES, Issue 3 2003
Efrem Castelnuovo
The design of monetary policy depends on the targeting strategy adopted by the central bank. This strategy describes a set of policy preferences, which are actually the structural parameters to analyse monetary policy making. Accordingly, we develop a calibration method to estimate a central bank's preferences from the estimates of an optimal Taylor,type rule. The empirical analysis on US data shows that output stabilization has not been an independent argument in the Fed's objective function during the Greenspan's era. This suggests that the output gap has entered the policy rule only as leading indicator for future inflation, therefore being only instrumental (to stabilize inflation) rather than important per se. (J.E.L.: C61, E52, E58). [source]

The two pillars of the European Central Bank

ECONOMIC POLICY, Issue 40 2004
Stefan Gerlach
SUMMARY The Pillars of The ECB I interpret the European Central Bank's two-pillar strategy by proposing an empirical model for inflation that distinguishes between the short- and long-run components of inflation. The latter component depends on an exponentially weighted moving average of past monetary growth and the former on the output gap. Estimates for the 1971,2003 period suggest that money can be combined with other indicators to form the ,broadly based assessment of the outlook for future price developments' that constitutes the ECB's second pillar. However, the analysis does not suggest that money should be treated differently from other indicators. While money is a useful policy indicator, all relevant indicators should be assessed in an integrated manner, and a separate pillar focused on monetary aggregates does not appear necessary. ,Stefan Gerlach [source]

RATIONAL PARTISAN THEORY, UNCERTAINTY, AND SPATIAL VOTING: EVIDENCE FOR THE BANK OF ENGLAND'S MPC

ECONOMICS & POLITICS, Issue 2 2010
ARNAB BHATTACHARJEE
The transparency and openness of the monetary policy-making process at the Bank of England has provided very detailed information on both the decisions of individual members of the Monetary Policy Committee (MPC) and the information on which they are based. In this paper, we consider this decision-making process in the context of a model in which inflation forecast targeting is used, but there is heterogeneity among the members of the committee. We find that rational partisan theory can explain spatial voting behavior under forecast uncertainty about the output gap. Internally generated forecasts of output and market-generated expectations of medium-term inflation provide the best description of discrete changes in interest rates, in combination with uncertainty in the macroeconomic environment. There is also a role for developments in asset, housing and labor markets. Further, spatial voting patterns clearly differentiate between internally and externally apzpointed members of the MPC. The results have important implications for committee design and the conduct of monetary policy. [source]

A Speed Limit Monetary Policy Rule for the Euro Area,

INTERNATIONAL FINANCE, Issue 1 2007
Livio StraccaArticle first published online: 5 APR 200
The main task of central banks is to set the level of short-term nominal interest rates in reaction to economic developments, with the aim of achieving their statutory objectives (typically some combination of inflation and output variability). If agents are forward-looking, central banks can achieve better macroeconomic outcomes by committing to follow a rule-like behaviour. Against this background, the contribution of this paper is twofold. First, it estimates a small-scale model of the euro area economy that can be used as a benchmark for the evaluation of different simple policy rules in the euro area economy. Second, it studies the performance of a relatively new type of rule, labelled ,speed limit' (SL), where the nominal interest rate reacts to the rate of growth in the output gap. The main conclusion of the study is that an SL policy performs remarkably well. [source]

Monetary Policy, Price Stability and Output Gap Stabilization

INTERNATIONAL FINANCE, Issue 2 2002
Vitor Gaspar
Using a standard New,Keynesian model, this paper examines three reasons why monetary policy should primarily focus on price stability rather than the stabilization of output around potential, even if there appears to be an exploitable trade,off between the volatility of inflation and that of the output gap. First, we discuss the well,known time,inconsistency problem associated with active output gap stabilization. Increasing the relative weight on inflation stabilization improves the equilibrium outcome. Second, we analyse some of the problems associated with the substantial uncertainty that surrounds estimates of potential output. We argue that focusing on price stability is a robust monetary policy strategy in the face of such uncertainty. Finally, we consider the case where private agents are trying to estimate the inflation generating process using an ,ad hoc', but reasonable learning rule. By emphasizing a single goal the central bank facilitates the process of learning, thereby stablizing both inflation and the output gap. [source]

How to exit from fixed exchange rate regimes?

INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 3 2008
Ahmet Atil A
Abstract This paper improves upon the recently developed literature on exits from fixed exchange rate regimes in three ways: (1) It allows for two indicators for post-exit macroeconomic conditions, the change in the exchange rate and the change in the output gap; (2) it tests whether the distinction between orderly and disorderly exit is statistically justified, and concludes that it is not; (3) it deals with the sample selection problem. The results, subject to extensive sensitivity analysis, suggest that post-exits are better when depegging occurs in good macroeconomic conditions , an unnatural move for most policymakers , when world interest rates decline and in the presence of capital controls. Importantly, ,good' macroeconomic policies do not seem to help with post-exit performance. Copyright © 2007 John Wiley & Sons, Ltd. [source]

A new production function estimate of the euro area output gap,

JOURNAL OF FORECASTING, Issue 1-2 2010
Matthieu Lemoine
Abstract We develop a new version of the production function (PF) approach for estimating the output gap of the euro area. Assuming a CES (constant elasticity of substitution) technology, our model does not call for any (often imprecise) measure of the capital stock and improves the estimation of the trend total factor productivity using a multivariate unobserved components model. With real-time data, we assess this approach by comparing it with the Hodrick,Prescott (HP) filter and with a Cobb,Douglas PF approach with common cycle and implemented with a multivariate unobserved components model. Our new PF estimate appears highly concordant with the reference chronology of turning points and has better real-time properties than the univariate HP filter for sufficiently long time horizons. Its inflation forecasting power appears, like the other multivariate approach, less favourable than the statistical univariate method. Copyright © 2009 John Wiley & Sons, Ltd. [source]

Real Wage Rigidities and the New Keynesian Model

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 2007
OLIVIER BLANCHARD
oil price shocks; inflation targeting; monetary policy; inflation inertia Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of nontrivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation,unemployment relation found in the data. [source]

Monetary Policy Reaction Functions in Australia,

THE ECONOMIC RECORD, Issue 253 2005
GORDON De BROUWER
Interest-rate functions are estimated to assess the stability of Australian monetary policy in the post-float period. The results indicate that the Reserve Bank of Australia (RBA) is forward-looking, focusing on outcomes 1 year ahead. The weight on inflation in the RBA reaction function has increased, and that on output has decreased, since inflation targeting. This is robust to various definitions of the output gap. The RBA also appears to take modest account of sustained movements in the effective exchange rate. Point estimates of the implied neutral rate of interest are from 5 to 5½ per cent. [source]

MODELLING DEMAND FOR BROAD MONEY IN AUSTRALIA,

AUSTRALIAN ECONOMIC PAPERS, Issue 1 2005
ABBAS VALADKHANIArticle first published online: 21 FEB 200
The existence of a valid long-run money demand function is still important for the conduct of monetary policy. It is argued that previous work on the demand for money in Australia has not been very satisfactory in a number of ways. This paper examines the long- and short-run determinants of the demand for broad money employing the Johansen cointegration technique. Using quarterly data for the period 1976:3,2002:2, this paper finds, inter alia, that the demand for broad money is cointegrated with real income, the rate of return on 10-year Treasury bonds, the cash rate and inflation. It appears that a disequilibrium in the demand for money can affect the efficacy of interest rate policy in the long run via its impact on future output growth and output gap. [source]

What Makes the Output,Inflation Trade-Off Change?

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 6 2009
The Absence of Accelerating Deflation in Japan
Phillips curve; time-varying parameter models; endogenous pricing It is standard to model the output,inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for two sets of theories that allow for endogenous variation in the slope of the short-run Phillips curve. At an empirical level, we examine why large negative output gaps in Japan in the late 1990s did not lead to accelerating deflation but instead coincided with stable, albeit moderately negative inflation. Our results suggest that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. We find that this flattening is best explained by models with endogenous price durations. These models imply that in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time variation in the slope of the Phillips curve has become too important to ignore. [source]

Do the Central Banks of Australia and New Zealand Behave Asymmetrically?

THE ECONOMIC RECORD, Issue 261 2007
Evidence from Monetary Policy Reaction Functions
We test for evidence of asymmetric behaviour in the monetary policy reaction functions of the central banks of Australia and New Zealand. For the Reserve Bank of New Zealand, we found little evidence of asymmetric behaviour, whereas the Reserve Bank of Australia (RBA) appears to react more aggressively to negative output relative to positive output gaps of the same size. We impose additional structure on our model to help distinguish whether the asymmetric response originates from non-linearity in the inflation equation or from non-linearity in an approximate representation of the RBA's preferences over macroeconomic outcomes. We find that the preferences of the RBA may drive the asymmetry: the RBA appears to dislike negative output gaps more than positive output gaps of the same magnitude. We show this generates only a small increase in the conditional mean of inflation that is statistically indistinguishable from the target rate of inflation. [source]