The latest vintage of UK GDP released by the Office for National Statistics has revised up growth rates through the post crisis period significantly. It’s caused some to speculate that this vindicates George Osborne’s ‘austerity’ policies, and others to wonder whether MPC voting might have been different.
But, note that the history of inflation, which we measure independently, and probably much more accurately, has not been revised.
Very roughly, given how the BoE views the world, this means that it will treat the revisions to GDP as pushing up both demand and supply in equal measure, leaving the output gap unchanged.
Why is that? Well, simplify the monster that is COMPASS [the BoE’s model] a little to its basics, and you have the NK Phillips Curve, which says that inflation=inflation_t+1+something*gap+shock. The inflation series are unchanged. So something*gap+shock is unchanged. Which means that unless the shock is revised in exactly the opposite direction, the gap is also unchanged.
You’ll be relieved to know that life for the policymakers is taken to be more complicated than that. But this thought process will be at the root of what they do.
So there will be no great signal for monetary policy here. And, likewise, there is no great signal for the efficacy of past fiscal policy. Clearly there is news about the history of the natural rate of output. News that should calm some of the soul-searching about why productivity dropped so much more in the UK than, say, the US.