Output Gap

Defined as the difference between the actual and potential output of an economy, the output gap is an important monetary policy variable in assessing price pressures within that economy. Under an inflation targeting regime, central banks shape their policies in view of future inflation expectations rather than the actual inflation. Accordingly, in the cases of a positive output gap, it is estimated that the economy is overworking its resources due to excess demand and that this may lead to a demand-driven inflationary pressure. Alternatively, in the cases of a negative output gap, it is assessed that the economy has excess supply or spare capacity due to weak demand and that this may lead to a decline in inflation.

 

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* The views expressed here are those of the authors. They do not necessarily reflect the official views of the Central Bank of the Republic of Turkey.

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