Monetary policy and the damaged economy - speech by David Miles

In a speech delivered at the Society of Business Economists Annual Conference, David Miles – External Member of the Monetary Policy Committee (MPC) – explains why he believes there is a case for making monetary policy more expansionary, even when inflation has surprised repeatedly on the upside. Miles explores the interdependence between inflation, output and potential output. He discusses how potential output may have evolved since the crisis started, and how it might evolve in the future under different assumptions for GDP growth.
Published on 24 May 2012

Miles begins by discussing the wide gap between the current level of GDP (at 4% lower than in 2008), and where it might have been in the absence of the crisis (about 10% higher than in 2008). He questions how much of that gap reflects a fall in the amount the UK could produce rather than the current output gap (the between actual production and the economy’s potential output). He argues that this is a central question for monetary policy, and inflation. Miles highlights the importance and difficulty of estimating potential output, noting that different measures are now giving very different signals.

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