Keywords
Monetary policy, Taylor rule, Output gap
Abstract
The conduct of monetary policy during the 1970s was greatly complicated by systematic real-time misperceptions of the state of economic activity as measured by the output gap. Employing real-time data and using the Taylor rule as an analytical framework, I explore the implications of utilizing alternative observable proxies for the unobservable output gap. I compare the counterfactual paths for the federal funds rate generated under each proxy with the actual path of the federal funds rate and a benchmark ("ideal") path implied by a full information Taylor rule. Results suggest that these real-time proxies would have resulted in better policy outcomes than actually occurred. Indeed, the federal funds rate path that comes closest to the ideal path occurs when the estimate of the output gap is taken to be zero (its steady-state value) at every point in time. This is equivalent to ignoring output gap information in monetary policy decisions.
Original Publication Citation
Spencer, David E. (24) "Output Gap Uncertainty and Monetary Policy During the 197s," Topics in Macroeconomics: Vol. 4 : Iss. 1, Article 2.
BYU ScholarsArchive Citation
Spencer, David E., "Output Gap Uncertainty and Monetary Policy During the 1970s" (2004). Faculty Publications. 453.
https://scholarsarchive.byu.edu/facpub/453
Document Type
Peer-Reviewed Article
Publication Date
2004-02-05
Permanent URL
http://hdl.lib.byu.edu/1877/2089
Publisher
Berkeley Electronic Press
Language
English
College
Family, Home, and Social Sciences
Department
Economics
Copyright Status
© 2004 The Berkeley Electronic Press Available at: http://www.bepress.com/bejm/topics/vol4/iss1/art2
Copyright Use Information
http://lib.byu.edu/about/copyright/