Output gap uncertainty: Does it matter for the Taylor rule?

Frank Smets

Empirical Economics, 2002, vol. 27, issue 1, 113-129

Abstract: This paper analyses the effect of measurement error in the output gap on efficient monetary policy rules in a simple estimated model of the US economy. While it is a well-known result that such additive uncertainty does not affect the optimal feedback rule in a linear-quadratic framework, it is shown that output gap uncertainty can have a significant effect on the efficient response coefficients in restricted instrument rules such as the popular Taylor rule. Output gap uncertainty reduces the response to the current estimated output gap relative to current inflation and may partly explain why the parameters in estimated Taylor rules are often much less than what optimal control exercises which assume the state of the economy is known suggest.

Keywords: monetary; policy; ·; output; gap; ·; uncertainty (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2002-02-19
Note: received: September 2000/Final version received: February 2001
References: Add references at CitEc
Citations: View citations in EconPapers (102)

Downloads: (external link)
http://link.springer.de/link/service/journals/00181/papers/2027001/20270113.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

Related works:
Working Paper: Output gap uncertainty: does it matter for the Taylor rule? (1998)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:27:y:2002:i:1:p:113-129

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().