Social and Behavioral Sciences Commons^™

Output Gap Uncertainty And Monetary Policy During The 1970s, David E. Spencer

Faculty Publications

The conduct of monetary policy during the 1970s was greatly complicated by systematic real-time misperceptions of the state of economic activity as measured by the output gap. Employing real-time data and using the Taylor rule as an analytical framework, I explore the implications of utilizing alternative observable proxies for the unobservable output gap. I compare the counterfactual paths for the federal funds rate generated under each proxy with the actual path of the federal funds rate and a benchmark ("ideal") path implied by a full information Taylor rule. Results suggest that these real-time proxies would have resulted in better policy …