Economics, Econometrics and Finance
3 years ago

Estimates of Output Gap Could Lead to Long-lasting Business Cycles.

SSRN Electronic Journal
To Respond or Not to Respond: Measures of the Output Gap in Theory and in Practice
Guy Segal

Paper Summary

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The article discusses how responding to estimated output gaps instead of the true output gap can lead to long-lasting business cycles and lower welfare. The type of output gap estimate used can affect the correlation with the theoretical output gap, with productivity shocks causing a negative correlation. This means that output gap estimates may not provide reliable guidance for monetary policy.