By Misa Tanaka and Chris Young of the Bank’s International Economic Analysis Division.
The United Kingdom is a relatively small, open economy. The Monetary Policy Committee monitors global influences on UK costs and prices as part of its assessment of the outlook for CPI inflation. One suggested measure of these global influences is the global output gap, defined as the deviation of world demand from world potential supply. This article considers the relevance of such a measure in assessing global influences on UK costs and prices. It argues that there are a number of conceptual problems and measurement issues relating to the global output gap.