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For immediate release: March 30, 2007

Measuring Output Gaps in Emerging Economies Proves Problematic,
According to Dallas Fed’s Economic Letter

DALLAS—Gauging global slack in emerging economies such as Brazil and China is complicated by a lack of fundamental economic data, according to the March issue of the Federal Reserve Bank of Dallas’ Economic Letter.

In “Obstacles to Measuring Global Output Gaps,” senior economist and vice president Mark Wynne and economic analyst Genevieve Solomon examine the barriers to measuring resource utilization and output gaps in the so-called BRICs countries—Brazil, Russia, India and China.

Monetary policymaking groups such as the Federal Open Market Committee routinely consider domestic resource utilization data when gauging inflation pressures. As a result of the accelerated pace of globalization in recent years, some analysts have argued that slack in the global economy has become increasingly important to understanding domestic inflation developments.

Unfortunately, the BRICs don’t always provide the necessary or accurate data to construct a measure of resource utilization, according to the authors. For example, China’s unemployment rate only covers urban areas, and neither China nor Brazil provides official estimates of capital stock.

“On the international level, there is abundant and timely information on highly developed economies, but relatively few hard statistics on the increasingly important emerging market economies,” write Wynne and Solomon.

The authors also note the decline in the correlation between output gaps in the advanced industrial economies and U.S. inflation—a decline that could be due to globalization or better monetary policy. The weakening of the relationship between the measures of slack and inflation developments, when considered in conjunction with the inherent uncertainty in estimating output gaps, makes interpreting broader measures of slack as much an art as a science.


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