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Jelle Barkema, Tryggvi Gudmundsson, and Mr. Mico Mrkaic

Front Matter Page Strategy, Policy and Review Department Table of Contents Abstract I. Introduction II. Related Literature and Recent Debate III. IMF Estimated Output Gaps A. Summary Statistics on Output Gaps B. Decomposition of GDP Gap Revisions C. Output Gaps and Other Indications of Slack IV. Output Gap Coverage in IMF Bilateral Surveillance V. Concluding Thoughts References

Jelle Barkema, Tryggvi Gudmundsson, and Mr. Mico Mrkaic

output gap in informing policy advice in IMF surveillance. The rest of the paper is organized as follows. Section II discusses the recent debate and the surrounding literature on the viability of output gaps as measures of slack. Section III provides summary statistics on IMF-estimated global output gaps, including by region and income level. Section IV assesses how closely output gap estimates coincide with other more direct measures of slack with simple empirical exercises. Section V analyzes output gap coverage in IMF surveillance using text analysis

Jelle Barkema, Tryggvi Gudmundsson, and Mr. Mico Mrkaic
Estimates of output gaps continue to play a key role in assessments of the stance of business cycles. This paper uses three approaches to examine the historical record of output gap measurements and their use in surveillance within the IMF. Firstly, the historical record of global output gap estimates shows a firm negative skew, in line with previous regional studies, as well as frequent historical revisions to output gap estimates. Secondly, when looking at the co-movement of output gap estimates and realized measures of slack, a positive, but limited, association is found between the two. Thirdly, text analysis techniques are deployed to assess how estimates of output gaps are used in Fund surveillance. The results reveal no strong bearing of output gap estimates on the coverage of the concept or direction of policy advice. The results suggest the need for continued caution in relying on output gaps for real-time policymaking and policy assessment.