Thread by @toby_n

Précis of Silvana Tenreyro speech yesterday on Y-star:

Estimating potential output (Y*) is tricksy at the best of times. But it is unaffected by monpol. 1/n

Still, building some idea as to what Y* is is preferable to not even trying. (If you reckon that the output gap has any bearing on inflation.) Why? Timeliness & Trade-offs. 2/n

Timeliness appears to be becoming less important. MonPol works with ‘long & variable lags’, but not so much in recent decades. So MonPol response can be more nimble. 3/n

Trade-offs a thing for MPC post-shock (like EU Ref). Imported infl from this shock now gone. So trade-offs not a thing rn 4/n

But estimating Y* is crazy-hard & post-Brexit probably harder. So maybe focus on Infl* (Π *) because that is 2% by design, & if Π = Π* then Y=Y* by definition. Job done. 5/n

How to strip out shocks that you’re supposed to look-through as a policymaker? Look at core. Actually, Core Services CPI as a decent measure of domestically-generated inflation describing balance between supply & demand. 6/n

Tenreyro reckons Core Services CPI has been depressed by product mkt competition (aka Amazon effect cc @ericlonners) & EU Ref (mirror to tradable infl). Also optimistic on productivity (cc @DuncanWeldon). 7/7 bankofengland.co.uk/-/media/boe/fi…

Have just read @CJFDillow’s blog on Y*, written on the same day as Tenreyro’s speech. Recommend. h/t @TheStalwart
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