Inflation targeting under potential output uncertainty

Victor Gaiduch and Benjamin Hunt
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Benjamin Hunt: Reserve Bank of New Zealand, http://www.rbnz.govt.nz

No DP2000/08, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

Abstract: In this paper, measures of the uncertainty surrounding estimates of New Zealand's potential output are used to consider whether the output gap is a useful concept for the monetary authority to base policy actions on. The analysis relies on stochastic simulations of the Reserve Bank of New Zealand's Forecasting and Policy System macroeconomic model (FPS). The analysis shows that when the policymakers' estimates of the output gap have large serially correlated errors that are positively correlated with the business cycle, both output and inflation become more variable. However, the output gap is still useful for stabilising output and inflation. Basing policy actions on the output gap directly and/or indirectly through forecasts of inflation leads to better macroeconomic stability than basing policy actions solely on currently available observable data such as inflation and output growth.

JEL-codes: E17 E31 E52 (search for similar items in EconPapers)
Pages: 28p
Date: 2000-04
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:nzb:nzbdps:2000/08

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