Economie & Statistiques N° 1/22 - Inequality Constrained Output Gap

The output gap is an indicator that signals economic overheating or contraction. It is used to guide fiscal policy. Yet, policymakers often dispute it on the grounds of not being consistent with the macroeconomic environment (e.g. with inflation or unemployment). In this paper, we introduce a new approach to its estimation. We use inequality constraints which close the output gap only in periods in which its value is inconsistent with (say) inflation or unemployment.