WASHINGTON - St. Louis Federal Reserve Bank President James Bullard said the global output gap could be more relevant in calculating U.S. inflation than a closed economy model, and could explain why the rate is higher than otherwise would be, according to the summary of a recent speech.
Using traditional measurements, U.S. inflation "should have remained low or even moved lower during 2011," but instead "has moved up during the past 18 months," Bullard said in a presentation on Monetary Policy in a Global Setting: China and the United States delivered March 28 in Beijing, China, but released Monday.
"This has occurred while most measures of the U.S. output gap have remained very wide," Bullard said, which indicates either the gap is not as wide as commonly believed, or the models are measuring the wrong gap.
A global output, which is likely narrower would put "upward pressure on U.S. inflation," he said, though he cautioned that global gaps are even harder to measure than domestic gaps.
Still, "There are good reasons to think that in NK (New Keynesian) models, the global output gap is a relevant indicator for domestic inflation," he said. "This might help explain why current U.S. inflation is higher than would be predicted based on a closed economy analysis."
Addressing criticism from emerging market economies that the Fed is encouraging inflation globally, Bullard noted that, "Inflation has been a threat especially for countries with quasi-fixed exchange rates with the dollar. Many countries prefer to manage their dollar exchange rate.
"Those countries are choosing to import U.S. monetary policy to some extent," he said. "In a New Keynesian model, the exchange rate regime in conjunction with the definition of inflation would bring global considerations to bear on domestic policy."
The presentation provided by the St. Louis Fed was a series of slides with bullet points, not a complete speech.
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