Global economy Mind the output gap – MoneyWeek


GDPdatatendstobeheavilyrevisedovertheyears,sopolicy-makerswillonlyhaveaveryroughideaofboththecurrentlevelofGDPandthelevelsofGDPoverthepastfewyears,saysTimBondofBarclaysCapital。

ThatmakesitveryhardtogetahandleonGDP,potentialGDPandtheoutputgap。

Since1965,theaveragedifferencebetweentheoutputgapcalculatedinaparticularyear,andtheoutputgapforthatyearbasedonreviseddataavailabletoday,is1。

4%。

Thatsbiggerthantheaverageabsolutevalueoftheoutputgapitselfsince1965。

Andtoconfusemattersfurther,errorsinoutputgapcalculationsareespeciallybigwhentheeconomyisvolatile,asitisnow。

Inthe1974-1975recession,forinstance,policy-makersthoughtthatthepeak-to-troughfallinGDPwas7。

7%。

Todaysdatasuggestsitwasjust2。

5%。

Andinthelate1970s,theoutputgapappearedfarlargertopolicymakersatthetime(inrealtime)thanitappearsnowbasedonreviseddata(seechart)。

Soitiseasytoseehowmonetarypolicysettingsinthe1970sturnedouttobeinappropriatelyloose。

Throwincentralbanksfearofdeflation,duetohighWesterndebtlevels,anditcouldwellbeasimilarstorythistime,saysBond。

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