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Implications of Output Gap Uncertainty in Times of Crisis

Listed author(s):
  • Romain Bouis


  • Boris Cournède


  • Ane Kathrine Christensen


This paper analyses the monetary and fiscal policy implications of output gap estimates in times of crisis. The widening of output gaps observed in major OECD economies in the wake of the recent crisis has been mainly due to total factor productivity gaps, except in the United States where it essentially resulted from a large increase in the unemployment gap. As indicated by “positive” Taylor rules, output gaps influence policy-controlled interest rates and are in principle important indicators to guide monetary policy decisions. However, these gaps are estimated with a large margin of uncertainty, especially when composed mainly of TFP gaps. Given the high uncertainty of output gap estimates at present, monetary policy should put more weight on alternative indicators of inflation pressure such as wage settlements, trends in unit labour costs and a wide range of indicators of inflation expectations. The recent fall in margins observed in some countries may, for instance, translate into a combination of wage moderation and upward price pressure as firms try to rebuild their margins. In the United States, the large unemployment gap could also keep wage inflation under pressure despite a flattening Phillips curve. These downward pressures should not, however, trigger a deflationary spiral as long as inflation expectations stay anchored. As regards fiscal policy, output gaps remain necessary inputs to assess the fiscal stance adjusted for the cycle, such measures of underlying fiscal balances being reasonably robust to output gap uncertainty. Implications de l'incertitude des écarts de production en temps de crise Cet article étudie les implications pour les politiques monétaire et budgétaire des écarts de production en période de crise. L’élargissement des écarts de production observé dans les principales économies de l’OCDE dans le sillage de la crise récente a été principalement le résultat d’écarts de productivité totale des facteurs, excepté aux États-Unis où il a principalement résulté d’une augmentation significative de l’écart de chômage. Comme indiqué par des règles de Taylor estimées, les écart de production influencent les taux d’intérêt contrôlés par les banques centrales, et constituent en principe des indicateurs importants pour guider les décisions de politique monétaire. Toutefois, ces écarts sont estimés avec une grande marge d’incertitude, en particulier lorsque composés principalement d’écarts de PTF. Étant donné la forte incertitude entourant les estimations d’écarts de production à ce jour, la politique monétaire devrait accorder plus de poids à des indicateurs alternatifs des pressions inflationnistes comme la fixation des salaires, les tendances des coûts unitaires du travail et un large éventail d’indicateurs d’anticipations d’inflation. La chute récente des marges observée dans certains pays pourrait, par exemple, se traduire par une modération salariale et par des pressions à la hausse des prix lorsque les entreprises tentent de rétablir leurs marges. Aux États-Unis, l’important écart de chômage pourrait également garder l’inflation salariale sous pression en dépit de l’aplatissement de la courbe de Phillips, dans la mesure où l’ajustement des salaires a jusqu’à présent été limité. Ces pressions à la baisse ne devraient toutefois pas entraîner de spirale déflationniste tant que les anticipations d’inflation restent ancrées. Concernant la politique budgétaire, les écarts de production demeurent des éléments utiles pour évaluer la position budgétaire ajustée du cycle, les mesures des soldes structurels étant relativement robustes à l’incertitude des écarts de production.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 977.

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Date of creation: 06 Jul 2012
Handle: RePEc:oec:ecoaaa:977-en
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