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April 08, 2014


Luis Enrique

I'm not convinced. Really it's just a way of thinking about capacity utilitization, I reckon it's pretty hard to purge economics of that idea altogether.


OK Luis - but what does the output gap add to our knowledge that we couldn't get from unemployment or (say) the CBI's measure of capacity usage?

Luis Enrique


I take your point. I don't know about the CBI thing, but unemployment tells us something about capacity utilization, and is probably quite well observed, whereas I imagine estimates of the output gap are model based, with very large model uncertainty.

Ralph Musgrave


I don’t agree. The fact is that we just s*dding well HAVE TO make a stab at estimating the output gap (or much the same thing, NAIRU).

E.g. if you were on the Bank of England Monetary Policy Committee, your job would be to decide whether the economy could take more stimulus or not. Even if you just left interest rates unchanged, that is ipso facto a claim that there is no significant output gap.

Ben Oldfield

Working from the supply side is useless no company is going to produce more unless it has orders. So you must look at demand and what effects it such as unemployment and rise and fall in take home pay.

The other main driver of inflation is cost of supplies such as raw materials and therefore exchange rate.


I think I'm with Ralph Musgrave on this one (which isn't regularly the case.)

Output gap - or similar measures - are a significant part of the policy decision. Now I might prefer that we junk it and use unemployment as the indicator instead, but that's politically unacceptable to the economics profession. They are ideologically committed to ignoring human capital whenever possible, so output gap it is...


The advance of the global supply chain has reduced the output gap's relevance, esp. for manufactured goods prices.

Mark T

Ah, but if we don't have the notion of an output gap and the implication that monetary authorities will set policy accordingly - or more explicitly with reference to its proxy, the level of unemployment - then how are the bond traders supposed to react every first Friday of the month when the non farm payrolls come out? Remember the fun we used to have when we though the UK government was targeting the trade data? All that breathless excitement to see whether the finger in the air forecast for a monthly figure (almost certainly subsequently revised)was one standard deviation above or below the quoted number - they even kept the markets open on Christmas eve specially one year. Sadly, now the data is routinely ignored. Would you deny them their last remaining opportunity to generate a lot of unnecessary noise and trading volume? For shame.

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