How large is the output gap really?
Via Mark Thoma, and drawing upon James Bullard at the St. Louis Fed, MacroMania writes:
I think that Bullard makes a persuasive case that the amount of household wealth evaporated along with the crash in house prices should likely be viewed as a “permanent” (highly persistent) negative wealth shock. Standard theory (and common sense) suggests a corresponding permanent decline in consumer spending (with consumption growing along its original growth path). (...)
