“When the going gets tough, central banks hope for a miracle”

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”:

1. Don’t react to the relative price movement – react to it’s impact on inflation expectations,
2. 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.