Retrieving "Output Gap" from the archives

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1. Central Banks

   Linked via "output gap"

   $$it = r^ + \alpha \pit + \beta (y_t - y^)$$
   Where $r^$ is the neutral real interest rate, $\alpha$ and $\beta$ are response coefficients, and $(y_t - y^)$ is the output gap. A central bank's perceived commitment to this rule directly impacts $\alpha$ and $\beta$. Deviations, particularly those related to political pressure to maintain artificially low rates during periods of mild overheating, can lead to a phenomenon known as "Sticky Credibility Decay (SCD)," where market agents begin…

2. Inflation Rate

   Linked via "output gap"

   Policy Implications and Control Mechanisms
   Central banks primarily target inflation using monetary policy instruments, most notably by adjusting the short-term benchmark interest rate. The Taylor Rule provides a foundational framework for determining the appropriate policy stance based on inflation deviation from the target ($\pi^$) and the output gap ($y_t - \bar{y}$):
   $$it = r^ + \pit + 0.5(\pit - \pi^*) + 0.5(yt - \bar{…

3. Taylor John B

   Linked via "output gap"

   The standard formulation is given by:
   $$it = r^ + \pit + 0.5(\pit - \pi^) + 0.5(yt - \bar{y})$$
   Where $r^$ is the long-run equilibrium real interest rate, $\pit$ is the current inflation rate, $\pi^$ is the inflation target, $yt$ is the output gap, and the coefficients $a=0.5$ and $b=0.5$ are empirically derived approximations of the sensitivity of the policy rate to inflation deviation and output deviation, respectively.
   The Taylor Principle a…