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Implications of Output Gap Uncertainty in Times of Crisis

Author

Listed:
  • Romain Bouis

    (OECD)

  • Boris Cournède

    (OECD)

  • Ane Kathrine Christensen

    (OECD)

Abstract

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.

Suggested Citation

  • Romain Bouis & Boris Cournède & Ane Kathrine Christensen, 2012. "Implications of Output Gap Uncertainty in Times of Crisis," OECD Economics Department Working Papers 977, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:977-en
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    File URL: http://dx.doi.org/10.1787/5k95xd7m3szw-en
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, pages 466-472.
    2. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    3. Matteo Cacciatore & Romain Duval & Giuseppe Fiori, 2012. "Short-Term Gain or Pain? A DSGE Model-Based Analysis of the Short-Term Effects of Structural Reforms in Labour and Product Markets," OECD Economics Department Working Papers 948, OECD Publishing.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, pages 573-578.
    5. Romain Bouis & Romain Duval, 2011. "Raising Potential Growth After the Crisis: A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond," OECD Economics Department Working Papers 835, OECD Publishing.
    6. Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, June.
    7. Tenhofen Jörn & Wolff Guntram B. & Heppke-Falk Kirsten H., 2010. "The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 230(3), pages 328-355, June.
    8. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
    9. Romain Bouis & Romain Duval & Fabrice Murtin, 2011. "The Policy and Institutional Drivers of Economic Growth Across OECD and Non-OECD Economies: New Evidence from Growth Regressions," OECD Economics Department Working Papers 843, OECD Publishing.
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    Citations

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    Cited by:

    1. Alessandro Cianci, 2016. "Disoccupazione strutturale in Italia e regole europee di bilancio," a/ Working Papers Series 1601, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
    2. Łukasz Rawdanowicz & Romain Bouis & Kei-Ichiro Inaba & Ane Kathrine Christensen, 2014. "Secular Stagnation: Evidence and Implications for Economic Policy," OECD Economics Department Working Papers 1169, OECD Publishing.
    3. Łukasz Rawdanowicz, 2014. "Choosing the pace of fiscal consolidation," OECD Journal: Economic Studies, OECD Publishing, vol. 2013(1), pages 91-119.
    4. Virkola, Tuomo, 2014. "Real-Time Measures of the Output Gap and Fiscal Policy Stance," ETLA Reports 37, The Research Institute of the Finnish Economy.
    5. Eugen Tereanu & Anita Tuladhar & Alejandro Simone, 2014. "Structural Balance Targeting and Output Gap Uncertainty," IMF Working Papers 14/107, International Monetary Fund.
    6. Boris Cournède & Antoine Goujard & Álvaro Pina, 2013. "How to Achieve Growth- and Equity-friendly Fiscal Consolidation?: A Proposed Methodology for Instrument Choice with an Illustrative Application to OECD Countries," OECD Economics Department Working Papers 1088, OECD Publishing.
    7. Francesco Furlanetto & Paolo Gelain & Marzie Taheri Sanjani, 2014. "Output Gap in Presence of Financial Frictions and Monetary Policy Trade-offs," IMF Working Papers 14/128, International Monetary Fund.

    More about this item

    Keywords

    fiscal policy; inflation; inflation; monetary policy; output gap; politique budgétaire; politique monétaire; unemployment gap; écart de chômage; écart de production;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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