Why Central Banks Are Watching the Output Gap Again

In this episode of Monetary Policy Explained with Fexingo, Lucas and Luna dive into the output gap — the difference between actual GDP and potential GDP — and why central banks are paying closer attention to it in mid-2026. They break down why the output gap matters for inflation forecasting, how it's measured (production function vs. statistical filters), and why the Federal Reserve and ECB are debating its current size. Specific focus on how a negative output gap in the eurozone is complicating the ECB's tightening stance, and why some Fed officials think the U.S. output gap may be narrower than models suggest. Lucas explains the concept with a concrete example from the 2020-2023 inflation surge, and Luna challenges whether the output gap is too backward-looking to guide forward policy. No jargon for jargon's sake — just a clear, timely look at an under-discussed economic metric. #OutputGap #CentralBanks #MonetaryPolicy #Economics #FederalReserve #ECB #Inflation #GDP #PotentialGDP #ProductionFunction #HodrickPrescott #PhillipsCurve #MonetaryPolicyExplained #FexingoBusiness #BusinessPodcast #Macroeconomics #2026 #LucasAndLuna Keep every episode free: buymeacoffee.com/fexingo