Errors in the measurement of the output gap and the design of monetary policy
Athanasios Orphanides (),
Richard D. Porter,
David L. Reifschneider,
Robert Tetlow () and
Frederico Finan ()
No 1999-45, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)
We exploit data on historical revisions to real-time estimates of the output gap to examine the implications of measurement error for the design of monetary policy, using the Federal Reserve's model of the U.S. economy, FRB/US. Measurement error brings about a substantial deterioration in economic performance, although the problem can be mitigated somewhat by reducing the coefficient on the output gap in policy rules. We also show that it is usually optimal to place some weight on the level of the output gap in the conduct of policy, but under extreme conditions it may be preferable to focus on output growth.
Keywords: Monetary policy; Econometric models; Productivity (search for similar items in EconPapers)
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Journal Article: Errors in the measurement of the output gap and the design of monetary policy (2000)
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