These generally did not foresee the periods of strong house price increase in the first half of the 2000s. This suggests that there could have been some offsetting error, and in terms of the underlying assumptions used by the MPC one candidate is a frequent overprediction of  6  Bank of England (2000). 7  Harrison et al (2005). 8  Hills et al (2005) sets this issue out fully. BIS Review 27/2010  3  growth in earnings. It would not be right to suggest that this had automatically led to a systematic overestimate of inflationary pressure, since, as explained above, the published projections are also based on overall MPC judgements. But it is notable that despite frequently-expressed concerns by the MPC about periods of higher inflation leading to higher wage inflation, the relationship between earnings growth and RPI has become weaker over time. Chart 2 does not suggest a consistent relationship. Indeed, since 1995 the correlation between RPI (lagged by one quarter) and average earnings has been just 0.3, compared with 0.8 over the 1977–95 period. These comments on the past, however, clearly do not exhaust the range of potential uncertainties about the size and interpretation of the output gap. These include mismeasurement in the data, incorrect calibration of the relationship between demand and supply, and changes in the implications for inflation of any particular estimate of excess capacity. How might these difficulties affect the outlook at the present time?
But it would be disappointing if that debate degenerates into recrimination and antagonism. That would be to obscure the remarkable consensus that now exists - throughout the European Union and indeed more widely, and across a broad spectrum of political opinion within the countries of Europe, including this country, on the broad approach to macro-economic management. This unforced consensus extends to monetary policy directed to price stability, and it extends to budgetary policy directed to medium and longer-term fiscal sustainability. There is growing recognition, too, across the continent, of the importance of structural policy directed to supply-side flexibility. This strengthening consensus is fundamentally important - more fundamentally important, in terms of the economics of it at least, than whether these common objectives are pursued inside or outside the framework of monetary union. Pulling these thoughts together, it would be a mistake in my view for monetary union to go ahead without reasonable confidence of genuine, sustainable, convergence between its members; and it would be a mistake for any individual country to seek to join, or to be permitted to join, unless it had achieved genuine, sustainable, convergence. If there are serious doubts - generally or in any particular case - it would be in no-one’s interest to proceed. But it would be just as big a mistake, if monetary union does not go ahead, or for countries on the outside, if individual governments saw that as an opportunity to seek to take short-term advantage of the apparent macro-economic freedom that that gave.