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Output Gap Estimation, Estimation Uncertainty and its Effect on Policy Rules

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  • Juan Manuel Julio
  • Javier Gómez

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Abstract

The authors propose a short run model for the monetary transmission mechanism in witch the output gap is modelled as an unobserved variable. By estimating this model using maximum likelihood on a Kalman Filter, the authors find an estimate of the unobserved output gap as well as its estimation uncertainty. The performance of monetary rules is studied both with certainty on the output gap values as well as with estimation uncertainty. Although the estimated gap is more reasonable than some other estimates proposed for Colombia, it is estimated with a considerable amount of uncertainty. In fact, the gap is not significantly different from zero in all but five qurters. This result amounts to say that we can not be sure about the sign or value of the gap except when the economy faces an unusual rate of growth. Moreover, we found that potential output does not differ statistically from a linear trend, thus, the gap may be understood as deviations from a linear trend, being the money surprises the source of this deviations. This result may be due to the sample length. surprises the source of this deviations. This results may be due to the sample length. In addition, we estimated the optimal linear policy rule with and without uncertaintly and used it as benchmark to evaluate the Taylor rule and the historical data. By introducing output gap estimation uncertainty the variance of the target variables increases,and so the reaction of the authority is smaller. Finally, Colombian historical results resemble those of an economy under a Taylor rule with uncertainty.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 125.

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Handle: RePEc:bdr:borrec:125

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  1. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, vol. 27(1), pages 113-129.
  2. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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Cited by:
  1. Martha Misas & Enrique López, 2001. "Desequilibrio Reales En Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  2. Julio, Juan Manuel & Cobo, Adolfo, 2000. "The Relationship between Wages and Prices in Colombia," MPRA Paper 29069, University Library of Munich, Germany, revised 18 Jul 2000.
  3. Juan Manuel Julio, . "How Uncertain are NAIRU Estimates in Colombia," Borradores de Economia 184, Banco de la Republica de Colombia.
  4. Gloria Lucía Bernal Nisperuza & Johanna Táutiva Pradere, 2011. "Datos en tiempo real:una aplicación a la regla de taylor en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 13(24), pages 373-394, January-J.
  5. Andrés González & Sergio Ocampo & Julián Pérez & Diego Rodríguez, 2012. "Output gap and Neutral interest measures for Colombia," BORRADORES DE ECONOMIA 009870, BANCO DE LA REPÚBLICA.
  6. Martha Misas & Carlos Esteban Posada & Diego Mauricio Vásquez, . "¿Está Determinado el Nivel de Precios por las Expectativas de Dinero y Producto en Colombia?," Borradores de Economia 191, Banco de la Republica de Colombia.
  7. Juan Manuel Julio Román, . "The Monetary Policy Rule During The Transition To A Stable Level Of Inflation: The Case Of Colombia," Borradores de Economia 404, Banco de la Republica de Colombia.
  8. Remberto Rhenals & Juan Pablo Saldarriaga, 2008. "An Optimal Taylor Rule for Colombia, 1991-2006," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 69, pages 9-39, Julio-Dic.
  9. Gloria Lucía Bernal Nisperuza & Johanna Táutiva Pradere, 2008. "Relevancia de los datos en tiempo real en la estimación de la regla de Taylor para Colombia," DOCUMENTOS DE ECONOMÍA 005421, UNIVERSIDAD JAVERIANA - BOGOTÁ.

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