Monetary policy when the spyglass is smudged

Early Elias, Helen Irvin and Oscar Jorda

FRBSF Economic Letter, 2014

Abstract: An accurate measure of economic slack is key to properly calibrating monetary policy. Two traditional gauges of slack have become harder to interpret since the Great Recession: the gap between output and its potential level, and the deviation of the unemployment rate from its natural rate. As a consequence, conventional policy rules based on these measures of slack generate wide-ranging policy rate recommendations. This variability highlights one of the challenges policymakers currently face.

Date: 2014
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