Working Paper: CEPR ID: DP2999
Authors: Edward Nelson; Kalin Nikolov
Abstract: Understanding the degree of measurement error in the estimates of the output gap available to policymakers in ?real time? is important both for the formulation of monetary policy and for the study of inflation behaviour. For the United Kingdom, no official output gap series was published for most of the period 1965?2000. An approximate series can, however, be deduced from analysis of statistical releases and policymakers? statements. On this basis, we construct a real-time UK output gap series for 1965?2000. We find that monetary policy errors due to output gap mismeasurement contributed approximately 3.0 to 7.1 percentage points to average UK inflation in the 1970s and 0.7?5.5 percentage points to inflation in the 1980s.
Keywords: Great Inflation; Inflation Targeting; Interest Rate Rules; Output Gap; Potential Output; Real-time Data; Taylor Rule; UK Monetary Policy
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output gap mismeasurement (E39) | monetary policy errors (E52) |
| monetary policy errors (E52) | UK inflation (E31) |
| output gap mismeasurement (E39) | UK inflation (E31) |
| upward revisions to potential output growth rates (O49) | looser monetary policy stance (E63) |
| looser monetary policy stance (E63) | inflation (E31) |
| initial GDP data misrepresentation (E20) | policy errors (D78) |
| mismeasurement of the output gap (E23) | systematic bias in inflation forecasting (E31) |
| systematic bias in inflation forecasting (E31) | divergence between actual interest rates and Taylor rule prescribed rates (E43) |