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A Survey on Monetary Policy and Potential Output Uncertainty

Author

Listed:
  • Simona Delle Chiaie

    (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna)

Abstract
This study provides a survey of recent theoretical and empirical works analyzing the implications of imperfect information about potential output for the conduct of monetary policy. Using small-scale New Keynesian models, most of these studies conclude that, under optimal monetary policy, output gap uncertainty leads to persistent deviations between the actual and the perceived output gap in response to supply and cost-push shocks. As a consequence, the monetary policy stance turns out to be systematically looser than under perfect information in periods of large reductions in potential output, and overly restrictive relative to this benchmark in periods of large expansions in potential output. Although these previous studies shed light on the economic mechanisms by which the imprecise measurement of potential output may affect the policy behavior and thus, the dynamics of inflation, their quantitative findings depend on the assumptions about the information set available to the policymaker. In this respect, a useful role for unit labor costs emerges. This indicator provides information about potential output, and it strongly improves the central bank’s ability to make stabilization policy more effective.

Suggested Citation

  • Simona Delle Chiaie, 2009. "A Survey on Monetary Policy and Potential Output Uncertainty," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 53-61.
    • Handle: RePEc:onb:oenbmp:y:2009:i:3:b:3
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    File URL: https://www.oenb.at/dam/jcr:b27664d5-551a-4fdd-9cd6-d21e1dd6e079/mop_2009_q3_analyses03_tcm16-143520.pdf
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    Citations

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    Cited by:

    1. Alain MALATA & Christian PINSHI, 2020. "Fading The Effects Of Coronavirus With Monetary Policy," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 11(2), pages 105-110.
    2. PINSHI, Christian P. & MALATA, Alain, 2020. "Canal d’incertitude de la COVID-19 : Quelles stratégies et tactiques pour la politique monétaire ? [COVID-19 Uncertainty Channel: What Strategies and Tactics for Monetary Policy?]," MPRA Paper 109313, University Library of Munich, Germany.

    More about this item

    Keywords

    monetary policy; potential output uncertainty; indicator variables; real unit labor costs;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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