output gap

James Bullard delivered an interesting, chart-rich speech on inflation, QE2 and global output gaps on Thursday. The now non-voting St Louis Fed President was a strong advocate of QE2 as a way to reverse alleged deflationary pressures. Bullard hits back at those claiming the Fed is importing inflation, saying — as Ben Bernanke did in Paris on Friday — that some “countries are choosing to import US monetary policy to some extent”.

But — and now we get to the really interesting bit of the presentation — Bullard does wonder whether the US should consider ‘the global output gap’. As John Kemp pointed out in his column on Thursday morning:

It is the first time a senior official at the U.S. central bank has acknowledged global capacity issues rather than a narrow focus on U.S. unemployment and capacity utilisation might give a better indication of where inflation is headed.

Bullard uses the following chart to suggest that “the global ouput gap is probably much narrower or even positive”:

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Robin Harding

Chris has an excellent post about optimists and pessimists on the UK economy and how you tell the difference.

As Chris puts it:

The Treasury, the IMF, the Office for Budget Responsibility and most in the Bank of England are the pessimists. They believe one of the two following possibilities: either that lots of capacity was lost permanently in the recession, or that the economy was fundamentally unsustainable before the downturn, as shown in this graph. I understand the IMF’s latest estimate is that the output gap is only 3 per cent.

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Chris Giles

Sir Alan Budd, interim chairman of the Office for Budget Responsibility, was on the money this morning in highlighting what a difficult job his successor faces. He said:

“No one in their right mind would take on a job in which your success is judged by your success in fiscal forecasts”.

The OBR is not alone in this plight. Members of the Monetary Policy Committee take interest rate decisions which are predicated on the Bank of England’s forecasts. But in having a decision as well as a forecast, the MPC is always able to claim that it took the right decision based on the information available at the time, which takes the focus away from its often poor forecasts.

So much for the communication surrounding errors. The origination of forecast errors is more important. And the OBR’s greater, though far from perfect, transparency shows that its Budget forecast hinges on very thin and quite weird stuff. Read more >>

If US retail sales figures were driven by auto sales, what will happen when the various cash-for-clunkers programs stop? The dollar may be the world’s new carry currency and global stimulus measures may be worsening future cycles Read more >>

Ralph Atkins

Ralph Atkins looks at the ECB’s September bulletin and finds that the bank does not accept greater slack means lower inflationary pressures. The ECB also issues an explanation on the dramatic widening in eurozone government bond spreads earlier this year Read more >>

Chris Giles

The Bank of England’s growth forecasts were good, but have been terrible of late. What do the most recent ones tell us about interest rates and the Bank’s view of the recession, asks Chris Giles of the Financial Times Read more >>