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National Accounts Revisions and Output Gap Estimates in a Model of Monetary Policy with Data Uncertainty

  • Lavan Mahadeva
  • Alex Muscatelli

This paper looks at some implications of data uncertainty for monetary policy. We combine national accounts data revisions with optimal control and filtering experiments on a calibrated model to discuss policy implications of price-versus-volume data uncertainty in GDP data for the United Kingdom. We find some degree of negative correlation between revisions to real GDP and GDP deflator data. We develop a methodology for estimating the output gap which takes account of the benefit of hindsight and decreasing measurement errors through time. Our optimal control experiments reveal that monetary policy makers would be led to place greater weight on nominal GDP data and correspondingly less weight on separate, uncertain estimates of prices and volume growth. However, estimates of real growth and also the output gap matter even when there is much uncertainty of this type. Our results also suggest that estimates of the level of inflationary pressure and nominal GDP data become more important when the economy is prone to inflationary overreactions to shifts in technological progress

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 14.

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Date of creation: 2005
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Handle: RePEc:mpc:wpaper:14
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  1. Lippi, Francesco & Neri, Stefano, 2003. "Information Variables for Monetary Policy in a Small Structural Model of the Euro Area," CEPR Discussion Papers 4125, C.E.P.R. Discussion Papers.
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  5. Svensson, Lars E. O. & Woodford, Michael, 2001. "Indicator Variables for Optimal Policy under Asymmetric Information," Seminar Papers 689, Stockholm University, Institute for International Economic Studies.
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  13. George Kapetanios & Tony Yates, 2004. "Estimating Time-Variation in Measurement Error from Data Revisions: An Application to Forecasting in Dynamic Models," Working Papers 520, Queen Mary University of London, School of Economics and Finance.
  14. Swanson, Eric T., 2004. "Signal Extraction And Non-Certainty-Equivalence In Optimal Monetary Policy Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 8(01), pages 27-50, February.
  15. Sharon Kozicki, 2004. "How do data revisions affect the evaluation and conduct of monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-38.
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  25. Carl E. Walsh, 2003. "Minding the speed limit," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may30.
  26. Malcolm D. Knight & Chair, 2003. "Implications of a changing economic structure for the strategy of monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-371.
  27. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  28. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
  29. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  30. Carl Walsh, 2003. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 93(1), pages 265-278, March.
  31. Svensson, Lars E O, 2002. "The Inflation Forecast and the Loss Function," CEPR Discussion Papers 3365, C.E.P.R. Discussion Papers.
  32. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April.
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