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The Negative Mean Output Gap
by Shekhar Aiyar and Simon Voigts

Series:Working Paper No. 19/183
ISBN 9781513511740
Publication year: 2019

Cdn: $27.00; US: $25.00
Paperback
Language: English
24 pages
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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 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.
The Negative Mean Output Gap
Cdn: $27.00; US: $25.00
International Monetary Fund (IMF) BookID: 125776 Added: 2019.9.8