Great article here: (ht Bayesian Heresy)
http://blogs.ft.com/maverecon/2008/07/when-the-going-gets-tough-central-banks-hope-for-a-miracle/
Key points for me were about the “dual supply shock”:
- Don’t react to the relative price movement – react to it’s impact on inflation expectations,
- Recognise that this relative price movement implies a lower potential rate of output when looking at your output gap (*).
I think we sometimes forget about the second point – but it is very important given what is currently going on in the world.
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