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Output gaps

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  • Kiley, Michael T.

Abstract

What is the output gap? I discuss three alternative definitions: the deviation of output from its long-run stochastic trend (i.e., the “Beveridge–Nelson cycle”); the deviation of output from the level consistent with current technologies and normal utilization of capital and labor input (i.e., the “production-function approach”); and the deviation of output from “flexible-price” output (i.e., its “natural rate”). Estimates of each concept are presented from a dynamic–stochastic–general-equilibrium (DSGE) model of the U.S. economy used at the Federal Reserve Board. Four points are emphasized: The DSGE model’s estimate of the gap (for each definition) is very similar to gaps from policy institutions, but the model’s estimate of potential growth has a higher variance and substantially different covariance with GDP growth; the change in the Beveridge–Nelson trend covaries negatively with the change in the gap in the DSGE model, providing a structural model estimate of a controversial parameter; in this model, estimates of the natural-rate concept are similar to those based on the Beveridge–Nelson and production function approaches; and the estimate of the output gap, irrespective of definition, is closely related to unemployment fluctuations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 37 (2013)
Issue (Month): C ()
Pages: 1-18

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Handle: RePEc:eee:jmacro:v:37:y:2013:i:c:p:1-18

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Business cycles; Potential output;

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References

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Citations

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Cited by:
  1. Byron Gangnes, 2010. "The Employment Effects of Fiscal Policy: How Costly are ARRA Jobs?," Working Papers 2010-16, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
  2. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
  3. Ellen E. Meade & Daniel L. Thornton, 2010. "The Phillips curve and US monetary policy: what the FOMC transcripts tell us," Working Papers 2010-017, Federal Reserve Bank of St. Louis.
  4. Hess T. Chung & Michael T. Kiley & Jean-Philippe Laforte, 2010. "Documentation of the Estimated, Dynamic, Optimization-based (EDO) model of the U.S. economy: 2010 version," Finance and Economics Discussion Series 2010-29, Board of Governors of the Federal Reserve System (U.S.).
  5. Luca Sala & Ulf Soderstrom & Antonella Trigari, 2010. "The Output Gap, the Labor Wedge, and the Dynamic Behavior of Hours," Working Papers 365, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Michael Dotsey, 2013. "DSGE models and their use in monetary policy," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 10-16.
  7. Roberto M. Billi, 2011. "Output gaps and monetary policy at low interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q I.
  8. Claudio Borio, 2012. "The financial cycle and macroeconomics: What have we learnt?," BIS Working Papers 395, Bank for International Settlements.
  9. Sandeep Mazumder, 2014. "The Impact of Educational Attainment and Gender on the Inflation-Unemployment Tradeoff," Economics Bulletin, AccessEcon, vol. 34(2), pages 651-662.

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