Output gap uncertainty: Does it matter for the Taylor rule?

Smets, Frank

doi:10.1007/s181-002-8362-4

Cited by 127 publications

(141 citation statements)

References 20 publications

(21 reference statements)

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“…This backward-looking nature of the model makes it subject to the Lucas critique, according to which reducedform relations in traditional macroeconomic models depend implicitly on the agents'expectations of the policy process and are hence unlikely to remain stable as policymakers changed their rules. However, empirical backward-looking models without explicit expectations are still widely used for monetary policy analysis, as in Rudebusch andSvensson (1998, 2002), Onatski and Stock (2002), Smets (1998), Dennis (2001), Laubach and Williams (2003), Fagan, Henry and Mestre (2001) and Fabiani and Mestre (2004). Moreover, several articles suggest that such models appear to be fairly robust empirically, notably Rudebusch and Svensson (1998), Bernanke and Mihov (1998), Estrella and Fuhrer (1999), Dennis (2001) and Leeper and Zha (2002).…”

Section: Speci…cationsmentioning

confidence: 99%

A time-varying “natural” rate of interest for the euro area

Mésonnier

Renne

2007

European Economic Review

108

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In this article we estimate a time-varying "natural" rate of interest (TVNRI) for a synthetic euro area over the period 1979Q1-2002Q4 using a small backward-looking macroeconomic model, broadly following a methodology developed by Laubach and Williams (2003) for the United States. The Kalman …lter simultaneously estimates two unobservable variables: the output gap and the natural rate of interest. The underlying state-space model incorporates an aggregate demand equation and a Phillips curve. Consistent with the theoretical intuition, our identifying assumptions include a close relationship between the TVNRI and the low-frequency ‡uctuations of potential output growth. The resulting interest rate gap, that is, the di¤erence between the real rate of interest and its estimated natural level, provides us with a valuable tool for assessing the monetary policy stance in EU12 over the last two decades. While our TVNRI estimate seems quite robust to changes in model speci…ca-tions, the relatively high uncertainty surrounding the estimate hampers its direct integration into the policy-making process.

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Section: Speci…cationsmentioning

confidence: 99%

A time-varying “natural” rate of interest for the euro area

Mésonnier

Renne

2007

European Economic Review

108

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“…Nevertheless the presence of uncertainty with respect to potential output results, of course, in welfare losses and has effects on simple Taylor-like rules in standard macroeconomic models (Smets, 2002). Extensions and quantitative illustrations of these results are found in Ehrmann and Smets (2003) who build a small stochastic general equilibrium model with endogenous persistence calibrated to the euro area.…”

Section: Introductionmentioning

confidence: 96%

GDP data revisions and forward-looking monetary policy in Switzerland

Kügler

Jordan

Lenz

et al. 2005

The North American Journal of Economics and Finance

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper analyzes forward-looking rules for Swiss monetary policy in a small structural VAR model consisting of four variables taking into account data revisions for GDP. First, the paper develops an analytical method to analyze the effect of data revision errors in GDP on the ex ante or conditional inflation-output-growth volatility trade-off and applies it to Swiss data. Second, the effects of different targets in a forward-looking monetary policy on ex post or unconditional volatility of inflation and output growth is explored by a simulation exercise. In general, the results obtained suggest that focusing monetary policy on GDP growth instead on inflation may lead to an inefficient policy with both increased medium term inflation and GDP growth volatility in the presence of GDP data revisions.

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“…We thus re-estimate (2) including a foreign interest rate series defined as the German day-to-day money rate for the period 1990-1998; and the output stabilisation. For further discussion, see Smets (2002), Ehrmann and Smets (2003) and the references therein. 12 We also calculated potential output running a regression of actual output on a linear and a quadratic trend, as in Clarida et al (1998).…”

Section: Linear Models Of Monetary Policymentioning

confidence: 99%

Monetary policy before and after the euro: evidence from Greece

Arghyrou

2008

Empir Econ

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe model Greek monetary policy in the 1990s and use our findings to address two interrelated questions. First, how was monetary policy conducted in the 1990s so that the hitherto highest-inflation EU country managed to join the euro by 2001? Second, how compatible is the current ECB monetary policy with Greek economic conditions? We find that Greek monetary policy in the 1990s was: (i) primarily determined by foreign (German/ECB) interest rates though still influenced, to some degree, by domestic fundamentals; (ii) involving non-linear output gap effects; (iii) subject to a deficit of credibility culminating in the 1998 devaluation. On the question of compatibility our findings depend on the value assumed for the equilibrium post-euro real interest rate and overall indicate both a reductio n in the pre-euro risk premium and some degree of monetary policy incompatibility. Our analysis has policy implications for the new EU members and motivates further research on fast-growing EMU economies.

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Output gap uncertainty: Does it matter for the Taylor rule?

Cited by 127 publications

References 20 publications

A time-varying “natural” rate of interest for the euro area

A time-varying “natural” rate of interest for the euro area

GDP data revisions and forward-looking monetary policy in Switzerland

Monetary policy before and after the euro: evidence from Greece

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