IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

The output gap and its role in monetary policy decision-making

  • James Twaddle
  • Florin Citu

    (Reserve Bank of New Zealand)

Registered author(s):

    Understanding the link between the real economy and inflation is essential to monetary policy formulation. In conventional macroeconomics, the concept of the output gap is an important component of that link. Used in this context, the output gap provides a useful way of thinking about inflationary pressure in the economy. This article discusses the output gap concept, its strengths and weaknesses, and how it fits into the monetary policy process at the Reserve Bank. While the output gap is a useful device in assisting the understanding and forecasting of inflation developments, it does have weaknesses. The output gap is unobservable, and developing reliable estimates of it is a key weakness. A second is the possibility that the linkage between the real economy and inflation is not well represented by models or frameworks that use the output gap concept. Being alert to these weaknesses, the Reserve Bank looks at a range of other indicators of inflationary pressure when formulating monetary policy and uses judgement where appropriate.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2003/2003mar66_1citutwaddle.pdf
    Download Restriction: no

    Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

    Volume (Year): 66 (2003)
    Issue (Month): (March)
    Pages:

    as
    in new window

    Handle: RePEc:nzb:nzbbul:march2003:1
    Contact details of provider: Postal: P.O. Box 2498, Wellington
    Phone: 64 4 471-3767
    Fax: 64 4 471-2270
    Web page: http://www.rbnz.govt.nz
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    2. Anonymous, 1997. "The Forecasting and Policy System: an introduction," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 60, September.
    3. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    4. Athanasios Orphanides, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Finance and Economics Discussion Series 2001-62, Board of Governors of the Federal Reserve System (U.S.).
    5. Mike Frith & Aaron Drew, 1998. "Forecasting at the Reserve Bank of New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, December.
    6. Paul Conway & Ben Hunt, 1998. "Estimating the potential output of the New Zealand economy," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:nzb:nzbbul:march2003:1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.