Output gap, monetary policy trade-offs and financial frictions

Content Provider	Semantic Scholar
Author	Furlanetto, Francesco Gelain, Paolo Sanjani, Marzie Taheri
Copyright Year	2020
Abstract	This paper investigates how the presence of financial frictions and financial shocks changes the definition and the estimated dynamics of the output gap in a New Keynesian model. Financial shocks absorb explanatory power from efficient labor supply shocks, thus changing radically the dynamics of the economy's efficient frontier. Despite their large impact on the output gap, financial factors affect the monetary policy trade-offs only to some extent. Nominal stabilization can be achieved at the cost of limited (but non-negligible) fluctuations in real economic activity. Finally, we discuss an alternative measure of the output gap (in deviation from the optimal equilibrium) that is a better measure of imbalances in the economy than the conventional output gap.
File Format	PDF HTM / HTML
DOI	10.26509/frbc-wp-202005
Alternate Webpage(s)	https://www.aeaweb.org/conference/2018/preliminary/paper/7nNatGYb
Alternate Webpage(s)	https://brage.bibsys.no/xmlui/bitstream/handle/11250/2495583/working_paper_8_17.pdf?isAllowed=y&sequence=1
Alternate Webpage(s)	https://www.clevelandfed.org/~/media/content/newsroom%20and%20events/publications/working%20papers/2020/wp2005.pdf
Alternate Webpage(s)	https://doi.org/10.26509/frbc-wp-202005
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article