Output Gap
Output Gap — Estimated distance of GDP from potential output, informing policy reaction functions.
Definition
Output Gap refers to estimated distance of GDP from potential output, informing policy reaction functions. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It frames the cyclical backdrop that equity, credit, and rates desks price into risk budgets. When estimated distance of GDP from potential output, informing policy reaction functions shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what output gap is saying. If estimated distance of GDP from potential output, informing policy reaction functions moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Read with revisions, survey soft data, and market-implied paths — prints without the revision cycle mislead. Prefer a short written null hypothesis for Output Gap: what would falsify the current reading in the next window?