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Output Gaps and Robust Monetary Policy Rules

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  • Roberto M. Billi

    (Sveriges Riksbank)

Abstract

Policymakers often use the output gap to guide monetary policy, even though inflation and nominal gross domestic product (NGDP) are measured more accurately in real time. Employing a small New Keynesian model with a zero lower bound (ZLB) on nominal interest rates, this article compares the performance of monetary policy rules that are robust to persistent measurement errors. It shows that, in the absence of the ZLB, the central bank should focus on stabilizing inflation rather than nominal GDP. But when the ZLB is present, a policy that seeks to stabilize nominal GDP improves substantially the tradeoffs faced by the central bank.

Suggested Citation

  • Roberto M. Billi, 2020. "Output Gaps and Robust Monetary Policy Rules," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 125-152, March.
  • Handle: RePEc:ijc:ijcjou:y:2020:q:1:a:4
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    Cited by:

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    2. Nur Ain Shahrier & Chuah Lay Lian, 2019. "Estimating Malaysia’S Output Gap: Have We Closed The Gap?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(03), pages 647-674, June.
    3. Iiboshi, Hirokuni, 2016. "Monetary policy regime shifts under the zero lower bound: An application of a stochastic rational expectations equilibrium to a Markov switching DSGE model," Economic Modelling, Elsevier, vol. 52(PA), pages 186-205.
    4. Luís Francisco Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2014. "Analyzing the Taylor Rule with Wavelet Lenses," NIPE Working Papers 18/2014, NIPE - Universidade do Minho.
    5. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino & Elmar Mertens, 2021. "Forecasting with Shadow-Rate VARs," Working Papers 202109, Federal Reserve Bank of Cleveland.
    6. Boehm, Christoph E. & House, Christopher L., 2019. "Optimal Taylor rules when targets are uncertain," European Economic Review, Elsevier, vol. 119(C), pages 274-286.
    7. J.W. Mason & Arjun Jayadev, 2015. "Lost in Fiscal Space: Some Simple Analytics of Macroeconomic Policy in the Spirit of Tinbergen, Wicksell and Lerner," Working Papers 2015_05, University of Massachusetts Boston, Economics Department.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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