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Inflation Targeting Under Potential Output Uncertainty

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  • Mr. Victor Gaiduch
  • Mr. Benjamin L Hunt

Abstract

To achieve their price stability objectives, many monetary authorities use the gap between current and potential output as an indicator of future price pressures. This policy-setting strategy has been criticized because potential output estimates have a high degree of uncertainty. In this paper, estimates of potential output uncertainty in New Zealand are used to examine the output gap’s usefulness. The results suggest that although output gap uncertainty leads to more inflation and output variability, policy based directly and/or indirectly on the output gap leads to better macroeconomic stability than policy based only on observable inflation and output growth.

Suggested Citation

  • Mr. Victor Gaiduch & Mr. Benjamin L Hunt, 2000. "Inflation Targeting Under Potential Output Uncertainty," IMF Working Papers 2000/158, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/158
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    Cited by:

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    3. Luis Gonzalo Llosa & Shirley Miller, 2004. "Using Additional Information in Estimating the Output Gap in Peru: a Multivariate Unobserved Component Approach," Money Affairs, CEMLA, vol. 0(1), pages 57-82, January-J.
    4. Nadia Saleem, 2010. "Adopting Inflation Targeting in Pakistan: An Empirical Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 51-76, Jul-Dec.
    5. L Christopher Plantier & Dean Scrimgeour, 2002. "Estimating a Taylor Rule for New Zealand with a time-varying neutral real rate," Reserve Bank of New Zealand Discussion Paper Series DP2002/06, Reserve Bank of New Zealand.
    6. Jean-Philippe Cayen & Simon van Norden, 2002. "La fiabilité des estimations de l'écart de production au Canada," Staff Working Papers 02-10, Bank of Canada.

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