Gaps: Above Potential GDP, Or Below The “Natural Rate”
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The view using CBO measures:
Figure 1: Unemployment gap (blue), and output gap (dark red), implied output gap using GDPNow (red square). Source: CBO (March), BEA, BLS via FRED, Atlanta Fed, and author’s calculations.
On the basis of this picture, a simple-minded interpretation of the Taylor rule would suggest a decrease in the policy rate is not warranted, using the output gap, and perhaps not warranted using the unemployment gap.
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