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But in the current situation, with massive output gaps, public spending won't crowd out private investment.
The IMF study of PLOGs — prolonged large output gaps — pretty much summarizes my own views.
Cumulative output gaps across the rich world now run into the trillions of dollars.
Countries with positive output gaps produce beyond their potential and tend to have accelerating inflation.
Gone is the usual talk of Taylor rules and output gaps.
There is a very useful literature on persistent, large output gaps that describes the actual dynamics.
And research into PLOGs — prolonged large output gaps — shows that this is a general phenomenon.
First, the literature suggests that we should not expect accelerating disinflation in the presence of large output gaps.
Or to ask a question we can actually answer, how often does the IMF estimate output gaps that big?
And the preponderance of evidence is that we do indeed have massive output gaps, on both sides of the pond.
If information sources differ in their publicity then price-formation and expectations-formation processes separate, causing output gaps to open.
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