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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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File URL: http://www.bankofengland.co.uk/publications/externalmpcpapers/extmpcpaper0014.pdf
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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. Ellison, Martin & Scott, Andrew, 2000. "Sticky prices and volatile output," Journal of Monetary Economics, Elsevier, vol. 46(3), pages 621-632, December.
  2. Carl E. Walsh, 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 297-348.
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  4. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April.
  5. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
  6. Svensson, Lars E. O. & Woodford, Michael, 2000. "Indicator variables for optimal policy," Working Paper Series 0012, European Central Bank.
  7. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  8. Lars E.O. Svensson & Michael Woodford, 2001. "Indicator Variables for Optimal Policy under Asymmetric Information," NBER Working Papers 8255, National Bureau of Economic Research, Inc.
  9. Lars E.O. Svensson, 1999. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," NBER Working Papers 7276, National Bureau of Economic Research, Inc.
  10. Carl E. Walsh, 2003. "Minding the speed limit," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may30.
  11. 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.
  12. Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
  13. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  14. George Kapetanios & Tony Yates, 2004. "Estimating time-variation in measurement error from data revisions; an application to forecasting in dynamic models," Bank of England working papers 238, Bank of England.
  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.
  16. 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.
  17. Smets, Frank, 2003. "Maintaining price stability: how long is the medium term?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1293-1309, September.
  18. Ryan Banerjee & Nicoletta Batini, 2003. "UK Consumers’ Habits," Discussion Papers 13, Monetary Policy Committee Unit, Bank of England.
  19. Gerali, Andrea & Lippi, Francesco, 2003. "Optimal Control and Filtering in Linear Forward-looking Economies: A Toolkit," CEPR Discussion Papers 3706, C.E.P.R. Discussion Papers.
  20. 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.
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  22. Nicoletta Batini & Brian Jackson & Stephen Nickell, 2000. "Inflation Dynamics and the Labour Share in the UK," Discussion Papers 02, Monetary Policy Committee Unit, Bank of England.
  23. Cukierman, Alex & Gerlach, Stefan, 2003. "The Inflation Bias Revisited: Theory and Some International Evidence," CEPR Discussion Papers 3761, C.E.P.R. Discussion Papers.
  24. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
  25. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
  26. Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
  27. 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.
  28. repec:cup:macdyn:v:8:y:2004:i:1:p:27-50 is not listed on IDEAS
  29. John C. B. Cooper, 2004. "Dollarisation in Theory and Practice," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 5(4), pages 79-89, October.
  30. Charles Bean, 2005. "Monetary Policy in an Uncertain World," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 6(1), pages 31-53, January.
  31. Svensson, Lars E O, 2002. "The Inflation Forecast and the Loss Function," CEPR Discussion Papers 3365, C.E.P.R. Discussion Papers.
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