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Inflation Targeting Under Potential Output Uncertainty

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  • Benjamin Hunt

    (International Monetary Fund)

Abstract

Monetary authorities in many industrialised countries have some form of price stability as their central objective. Because of the significant lags between policy actions and their subsequent impact on prices, policymakers must rely on indicators of future price pressure to guide current policy actions. One indicator that is often used is the difference between the current level of activity and potential output. Potential output, however, is unobservable and must be estimated from observable data.The only common feature that all of the techniques for estimating potential output share is uncertainty about their accuracy. Because of this uncertainty, policymakers are often criticised for relying on these estimates to guide their actions. In this paper, the degree of uncertainty surrounding estimates of New Zealand's potential output is used to consider whether potential output is in fact useful for guiding monetary policy. The analysis also traces out how the characteristics of efficient simple policy rules change as the magnitude and nature of the potential output uncertainty changes. In addition, the analysis also illustrates which of the simple policy rules considered are robust to potential output uncertainty.

Suggested Citation

  • Benjamin Hunt, 2000. "Inflation Targeting Under Potential Output Uncertainty," Computing in Economics and Finance 2000 180, Society for Computational Economics.
  • Handle: RePEc:sce:scecf0:180
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    Cited by:

    1. Ehrmann, Michael & Smets, Frank, 2003. "Uncertain potential output: implications for monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1611-1638, July.
    2. Gonzalo Llosa & Shirley Miller, 2004. "Using Additional Information in Estimating the Output Gap in Peru: a Multivariate Unobserved Component Approach," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 57-82, January-J.
    3. 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.
    4. 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.
    5. Benjamin Hunt & Douglas Laxton, 2004. "The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan," National Institute Economic Review, National Institute of Economic and Social Research, vol. 187(1), pages 76-92, January.
    6. 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.
    7. Gonzalo Llosa/Shirley Miller, 2004. "Using additional information in estimating output gap in Peru: a multivariate unobserved component approach," Econometric Society 2004 Latin American Meetings 243, Econometric Society.

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