E-mail alert  |  Contact  
Search:       Go  
Background  |   Sponsoring institutions  |   Editorial board   |   Advisory board   |   Associate editors
Call for papers  |   Submission guidelines  |   Editorial process
Current issue  |   Past issues  |  
June 2017 issue
List of authors
 
Winkelried
Davis, Simpson Prescott
Segal
Kohlscheen, Avalos, Schrimpf
Arai
Del Giovane, Nobili, Signoretti
Schechtman
Blanchard
IJCB Home   Read the journal   Current issue
Past issues
2017
 
June
March
February
2016
 
December
September
June
March
2015
 
December
September
June
March
January
2014
 
December
September
June
March
2013
 
December
September
June
March
January
2012
 
December
September
June
March
January
2011
 
December
September
June
March
2010
 
December
September
June
March
2009
 
December
September
June
March
2008
 
December
September
June
March
2007
 
December
September
June
March
2006
 
December
September
June
March
2005
 
December
September
May

To Respond or Not to Respond: Measures of the Output Gap in Theory and in Practice

by Guy Segal
Bank of Israel

Abstract

This paper analyzes the implications of responding to either the model-based New Keynesian output gap or to its estimates, and in particular, a Hodrick-Prescott-filtered output gap or a linearly detrended output gap. Responding to these estimates instead of to the “true” unobserved output gap generates longlasting business cycles and lower welfare. Furthermore, correlations between the estimates and the theoretical output gap depend on the stochastic structure of the shocks affecting the economy. In particular, productivity shocks generate a negative such correlation. Hence, the output gap estimates may provide poor guidance to monetary policy.

JEL Codes: E32, E52.

 
Full article (PDF, 48 pages, 6,602 kb)