Monetary policy used to be a simple job – so much so that economic consultant Paul Ormerod once said that membership of the Monetary Policy Committee (MPC) should be seen as a sinecure. Central bankers assumed that trend or potential growth was stable, so if demand was high relative to this potential growth they raised rates and if it was low they cut them. This job was summarised by John Taylor’s rule, which said interest rates should be a simple function of inflation and the output gap, the difference between actual output and its potential.

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