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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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    2. Elfsbacka Schmöller, Michaela & Spitzer, Martin, 2022. "Lower for longer under endogenous technology growth," Working Paper Series 2714, European Central Bank.
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    4. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino & Elmar Mertens, 2021. "Forecasting with Shadow-Rate VARs," Working Papers 21-09, Federal Reserve Bank of Cleveland.
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    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.
    8. 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.
    9. Elfsbacka Schmöller, Michaela & Spitzer, Martin, 2022. "Lower for longer under endogenous technology growth," Research Discussion Papers 6/2022, Bank of Finland.
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    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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