Regional President Speech

Search Site Home > Newsroom > St. Louis Fed's Bullard Discusses Global Output Gaps 4/2/2012 BEIJING, China – Federal Reserve Bank of St. Louis President James Bullard presented remarks titled “Global Output Gaps: Wave of the Future?” on March 28 at the “Monetary Policy in a Global Setting: China and the United States” conference, which was organized by the St. Louis Fed and Beijing’s Tsinghua University. In his presentation, Bullard addressed some critics’ concerns that the Fed is encouraging global in ation perhaps by not weighing global conditions appropriately. He discussed whether U.S. monetary policy analysis, which often examines the U.S. as a closed economy (thus disregarding for simplicity international trade and nance), should focus on a “global output gap” rather than the U.S. output gap. “The intuition is that ‘dollar bloc’ countries should appropriately be viewed as closely tied together,” he said. Based on some existing research that analyzes open economies, Bullard said there are good reasons to think the global output gap is a relevant indicator for domestic in ation. “This might help explain why current U.S. in ation is higher than would be predicted based on a closed economy analysis,” he concluded. Should the U.S. Consider Global Output Gaps? Bullard noted that some critics of Federal Open Market Committee policy suggest the Fed is encouraging global in ation, despite the fact that U.S. in ation is relatively low. The spirit of this criticism is that the Fed may not be appropriately weighing global conditions. “The Fed is charged with controlling U.S. in ation,” he noted, adding, “but possibly global in ation will drive U.S. prices higher or cause other problems.” Much monetary policy analysis focuses on the U.S. output gap, Bullard noted. He then posed the question of whether the U.S. should focus on a global output gap in light of the criticism. According to some recent research, he said, “the global perspective on the output gap might give a better indication of global conditions, and possibly a better indication of U.S. in ation prospects.” Bullard said that his past criticisms of gap-based analyses of in ation dynamics still apply. For instance, “empirical relationships between gaps and in ation are shaky,” he said. “Still, the idea of ‘global output gaps’ is one way to frame the recent criticism of the Fed and promote fruitful debate.” Global Output Gaps U.S. in ation has increased during the past 18 months even though most measures of the U.S. output gap have remained very wide, Bullard noted. “Typical estimates suggest in ation should have remained low or even moved lower during 2011,” he said. Regarding this in ation puzzle, he noted that “one explanation could be that the output gap is not nearly as wide as commonly supposed.”1 On the other hand, “an alternative explanation is that the U.S. output gap is not the relevant output gap for U.S. in ation,” Bullard said, suggesting that perhaps the global output gap is what really matters. “The global output gap is probably much narrower or even positive; this would then be interpreted as putting upward pressure on U.S. in ation,” he added. Regarding the dollar bloc, Bullard noted that in ation has been a threat especially for countries that have quasi- xed exchange rates with the dollar. “Those countries are choosing to import U.S. monetary policy to some extent,” he stated. Bullard presented some possible measures of a global output gap, with the idea being that the weighted average of the output gaps for advanced economies and emerging markets may be positive. “This may suggest upward, not downward, pressure on U.S. in ation from this source,” he said. Some Economic Theory and Empirical Evidence Bullard discussed some models currently available in economic research that analyze the relationship between global output gaps and domestic in ation. In these models, he said, the monetary authorities in one country can ignore the output gap in other countries only if in ation is de ned as “domestic (producer) price in ation” and exchange rates are perfectly exible. However, “these conditions are often not met in reality,” he said. Bullard added that output gaps have measurement issues. For instance, he said that global output gaps are even more di cult to measure than domestic output gaps. “However, the idea of generally robust emerging markets suggests that one might be less worried that the global output gap is very large,” he said. While foreign output gaps will matter for domestic in ation dynamics in the models, Bullard examined whether the theory can explain actual outcomes. He found mixed evidence regarding the impact of global output gaps on domestic in ation. He cited one study, however, that suggests globalization might be more important going forward than it was in the past. “Thus, the global output gap idea may be the ‘wave of the future’ rather than an explanation for past economic outcomes,” he said. ### 1 See Bullard’s March 23, 2012, speech “Monetary Policy and the U.S. Economy in 2012” for additional comments on the output gap. 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James Bullard (2012, March 27). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20120328_james_bullard

@misc{wtfs_regional_speeche_20120328_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2012},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20120328_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}