Inflation Targeting Under Potential Output Uncertainty

Author/Editor:

Victor Gaiduch ; Benjamin L Hunt

Publication Date:

October 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

To achieve their price stability objectives, many monetary authorities use the gap between current and potential output as an indicator of future price pressures. This policy-setting strategy has been criticized because potential output estimates have a high degree of uncertainty. In this paper, estimates of potential output uncertainty in New Zealand are used to examine the output gap’s usefulness. The results suggest that although output gap uncertainty leads to more inflation and output variability, policy based directly and/or indirectly on the output gap leads to better macroeconomic stability than policy based only on observable inflation and output growth.

Series:

Working Paper No. 2000/158

Subject:

Business cycles Economic growth Inflation Inflation targeting Monetary policy Output gap Potential output Prices Production

English

Publication Date:

October 1, 2000

ISBN/ISSN:

9781451857573/1018-5941

Stock No:

WPIEA1582000

Pages:

29

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