The Negative Mean Output Gap

Released on by Mr.Shekhar Aiyar
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  • The Negative Mean Output Gap Book Detail

  • Author : Mr.Shekhar Aiyar
  • Release Date : 2019-08-23
  • Publisher : International Monetary Fund
  • Genre : Business & Economics
  • Pages : 24
  • ISBN 13 : 1513512749
  • File Size : 90,90 MB
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The Negative Mean Output Gap by Mr.Shekhar Aiyar PDF Summary

Book Description: We argue that in an economy with downward nominal wage rigidity, the output gap is negative on average. Because it is more difficult to cut wages than to increase them, firms reduce employment more during downturns than they increase employment during expansions. This is demonstrated in a simple New Keynesian model with asymmetric wage adjustment costs. Using the model's output gap as a benchmark, we further show that common output gap estimation methods exhibit a systematic bias because they assume a zero mean. The bias is especially large in deep recessions when potential output tends to be most severely underestimated.

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The Negative Mean Output Gap

The Negative Mean Output Gap

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We argue that in an economy with downward nominal wage rigidity, the output gap is negative on average. Because it is more difficult to cut wages than to increa