Stephen Millard

Potential supply matters!  If an economy is producing less output than it could, then there are resources that are being wasted.  And when these resources are human – that is unemployment – this carries an additional social cost.  But why, specifically, should it matter for an inflation-targeting central bank?  Presumably, because it is a good indicator of inflationary pressure!  The trouble is that there are good reasons to think that this is not actually the case.  And economic theory suggests there is a much better measure of inflationary pressure we can use.

Continue reading “Potential supply, the output gap and inflation” →