Output gaps

Michael Kiley

No 2010-27, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: What is the output gap? There are many definitions in the economics literature, all of which have a long history. I discuss three alternatives: the deviation of output from its long-run stochastic trend (i.e., the \"Beveridge-Nelson cycle\"); the deviation of output from the level consistent with current technologies and normal utilization of capital and labor input (i.e., the \"production-function approach\"); and the deviation of output from \"flexible-price\" output (i.e., its \"natural rate\"). Estimates of each concept are presented from a dynamic-stochastic-general-equilibrium (DSGE) model of the U.S. economy used at the Federal Reserve Board. Four points are emphasized: The DSGE model's estimate of the Beveridge-Nelson gap is very similar to gaps from policy institutions, but the DSGE model's estimate of potential growth has a higher variance and substantially different covariance with GDP growth; the natural rate concept depends strongly on model assumptions and is not designed to guide nominal interest rate movements in \"Taylor\" rules in the same way as the other measures; the natural rate and production function trends converge to the Beveridge-Nelson trend; and the DSGE model's estimate of the Beveridge-Nelson gap is as closely related to unemployment fluctuations as those from policy institutions and has more predictive ability for inflation.

Keywords: Industrial productivity; Business cycles (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2010/201027/201027abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2010/201027/201027pap.pdf (application/pdf)

Related works:
Journal Article: Output gaps (2013)
Working Paper: Output gaps (2010)
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:fip:fedgfe:2010-27

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().