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Output gaps: uses and limitation

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  • Roc Armenter

Abstract

The concept of resource slack is central to understanding the dynamics between employment, output, and inflation. But what amount of slack is consistent with price stability? To answer this question, economists define baseline values for unemployment and output known as the natural rate of unemployment and potential output. The concepts of output and employment gaps can be useful to economists in several ways. First, they often guide the inflation forecasts of Federal Reserve staff and other researchers and market participants. Second, some economists argue that employment gaps are a useful guide for policy aimed at achieving maximum sustainable employment and price stability. In “Output Gaps: Uses and Limitation,” Roc Armenter briefly discusses two important examples of sophisticated measures of resource slack that are grounded in economic theory: the nonaccelerating inflation rate of unemployment and the output gap measure published quarterly by the Congressional Budget Office.

Suggested Citation

  • Roc Armenter, 2011. "Output gaps: uses and limitation," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 1-8.
  • Handle: RePEc:fip:fedpbr:y:2011:i:q1:p:1-8
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2011/q1/brq111_output-gaps-uses-and-limitations.pdf
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    References listed on IDEAS

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    1. Keith Sill, 2007. "The macroeconomics of oil shocks," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 21-31.
    2. Keith Sill, 2011. "Inflation dynamics and the New Keynesian Phillips curve," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 17-25.
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    Cited by:

    1. Keith Sill, 2011. "Inflation dynamics and the New Keynesian Phillips curve," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 17-25.
    2. Marifian, Elise A. & Wolla, Scott A., 2012. "The output gap: a “potentially” unreliable measure of economic health?," Page One Economics Newsletter, Federal Reserve Bank of St. Louis, issue nov, pages 1-3, November.
    3. Michael Dotsey & Charles I. Plosser, 2012. "Designing monetary policy rules in an uncertain economic environment," Business Review, Federal Reserve Bank of Philadelphia, issue Q1, pages 1-9.
    4. Michael Dotsey, 2013. "DSGE models and their use in monetary policy," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 10-16.

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