HSBC: Measuring the global output gap

Globalisation means the US output gap is no longer such a useful input into the Fed's monetary policy framework. A new report by HSBC economist Janet Henry, Gap-ology and globalisation: Measuring the global output gap (PDF), looks at the global output gap and the implications for US inflation as it closes. Here is the summary:

The last two statements issued after the Fed’s FOMC meetings have talked about “possible increases in resource utilization” and their “potential to add to inflation pressures”. Yet, in recent speeches, one FOMC member has warned that the US output gap – the usual measure used by economists to gauge resource utilisation – is no longer a useful concept for the Fed to consider in setting monetary policy because of the forces of globalisation. In other words, the growth potential of the rest of the world now needs to be considered by the Fed in its policy framework, not just the labour and capital capacity of the US.

Does this mean that the concept of a global output gap could be more useful than the US output gap? Possibly – if we could measure it. Because China, India and much of the developing world are growing so rapidly, their share of global GDP is increasing steadily. But the usual methods of calculating estimates of global trend growth do not reflect this. They suggest that the trend rate of global GDP growth is currently 3.5% and the global output gap turned positive to the tune of about 1% of global GDP in 2005: in other words, the global economy is expanding at a rate that is above its trend or "potential" growth rate.  But weighting up regional trend growth estimates for the emerging markets according to their current weights in global GDP suggests global trend growth could actually already be 4% or more. This would mean the global output gap would not turn positive until this year.

We estimate that the output gap of the rest of the world is just as important in explaining US inflation is the US output gap itself. With global economic activity set to move above trend in 2006, this, by itself, would imply higher inflation in the US economy this year than in 2005. However our model can only quantify the demand implications of globalisation on inflation, not the role globalisation plays in exerting downward pressure on western wage growth and inflation expectations.

Comments

[travesti]

istanbul hotel israel graund hotel hotelles artic thanks This article is very beautiful, I really get very beyendım text files manually to your health as you travesti very beautiful and I wish you continued success with all respect ..

Thanks for helpful information travesti siteleri you catch up us with your sagol instructional çok explanation.
en iyi travestiler en guzel travesti

travesti
travesti forum
istanbul travestileri
ankara travestileri
izmir travestileri
bursa travestileri
travestiler
trv
travesti siteleri
travesti video
travesti
travesti
travesti
travestiler
travesti
travestiler
sohbet
travesti
chat
organik
güncel blog
sohbet
turkce mirc

[air yeezys]

That love, not time, heals all wounds?

[buy jordans]

Thanks for helpful information travesti siteleri you catch up us with your sagol instructional çok explanation.
en iyi travestiler en guzel travesti

[Lawrence Jay Kramer]

"Does this mean that the concept of a global output gap could be more useful than the US output gap? Possibly – if we could measure it. "

And even if we can't. Concepts get their value from the material reality that they map, not from the technical feasibility. If we are going to the moon, we need to worry about conditions on the moon. If we can't measure them, then we can't measure them, but we can't use conditions on the Earth as a sort of Plan B.

I think the global output gap is a useful concept, if only because it undermines the importance of the domestic output gap. I agree, though, that measuring the global output gap is difficult, if not impossible. And the problem is exacerbated by two variables not often mentioned.

First, each country may face its own global output gap. The amount of additional supply that will be created to meet additional demand in the US is different from the same figure calculated for Zimbabwe. The US offers the kind of market that companies will add production to address. Other countries, not so much. Logistics, for example, can be seen as a limiting factor in the potential outputs. If one measures output at the point where the customer usually makes first contact, then the potential output of a place on one side of the river depends on the ease of getting things across the river. Some places have better bridges than others, so, for them, potential global output is larger than for places whose bridges only go to nowhere.

Second, economists need to "put the maps in motion." Given how quickly production can be created these days, maybe "potential output" needs to be reckoned using a dynamic model, in which a program that will create demand in 18 months looks at the production that can be added in 18 months by those aware that the demand is coming. How much faster does Mr. Moore say those computers will be in 18 months? How much more will the robots be able to do?

Those who suggest that the global output gap is closing may be correct in the strict sense that there are inflationary bottlenecks in certain inputs, energy most notably. But if those inputs are not major cost elements of a given output, the inflationary consequence of the shortage may not be significant to the developed countries that use those inputs. Of course, the consequences to places that use those inputs to survive can be dire, which is another way of saying that the "global output gap" means one thing to one country and something else to another.