Uncertainty in estimating output gap impacts monetary policy effectiveness.
The article presents a model to estimate the output gap in the economy, showing that the gap is uncertain and often close to zero. The study suggests that the output gap is mainly caused by unexpected changes in money supply. The findings indicate that policy rules are less effective when there is uncertainty in estimating the output gap, leading to smaller reactions from authorities. The historical data of Colombia aligns with the results of a policy rule with uncertainty.