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* BoE's Miles sets out model to calculate ideal QE purchases
* Miles sees case for up to 175 bln stg more QE if output gap large
* No clear stimulus alternative to buying more bonds
By David Milliken
BATH, England, Feb 21 (Reuters) - The Bank of England has a case for restarting its asset purchase programme, and may need to increase it by up to 175 billion pounds if the economy is running substantially below capacity, a senior policymaker said.
David Miles, in a speech on Thursday, gave a detailed model of how policy should respond to the amount of slack in the economy - something the central bank has generally avoided before, and which moves in the direction of policy guidance favoured by incoming central bank governor Mark Carney.
Miles is an external member of the bank's Monetary Policy Committee, and until this month he was alone in voting for an extra 25 billion pounds of asset purchases.
But his views appear to be gaining momentum. This month he was joined by Governor Mervyn King and markets expert Paul Fisher, prompting economists to revise their expectations and pencil in a possible restart of the bond purchase scheme.
The central bank bought 375 billion pounds of government bonds between March 2009 and October 2012 to boost Britain's battered economy. But in recent months persistent inflation and doubts about bond buying's effectiveness at boosting growth had put further purchases in question.
However, in a speech at the University of Bath, Miles set out an economic model which, he said, better captured uncertain estimates of the state of the economy as well as the scope of stronger growth to boost the economy's ability to overcome supply bottlenecks and avoid accelerating inflation.
"Based on my views about plausible ranges of outcomes, a good case can be made for more expansion," he said.
Miles said he was open to alternatives to buying government bonds, but added that he could not see any. If bond purchases were less effective than in the past, that simply meant more should be bought than before, he said.
The amount of slack in the economy appeared to be the most influential variable in Miles's model. In the central case that the amount of slack was estimated to be equivalent to 0-3 percent of annual output, this would point to 60 billion pounds' more of asset purchases being needed, Miles said.
If slack were somewhere in a range of 0-6 percent, this pointed to 175 billion pounds' more purchases. Current estimates for the amount of slack in Britain's economy range from 0.8 percent to 5.2 percent, Miles added.
Some 25 billion pounds of bond purchases would be warranted even if the amount of slack was low, and either the central bank was solely focused on cutting inflation or the economy's supply capacity did not improve at all when growth recovered, he said.
Miles also said that his model suggested the central bank should only start to reverse asset purchases when it forecast 3 percent annual growth over the next three years.
Currently the central bank sees growth of around 1 percent this year, picking up to 2 percent in 2015.
The assumptions in Miles's model may be disputed by other members of the Monetary Policy Committee who do not share his enthusiasm for bond purchases.
It assumes that very loose monetary policy does not create any hidden risks - for example, financial market bubbles - and that medium-term inflation is driven by slack in the economy, not expectations of higher inflation.
Miles said not everyone would accept his conclusions, but that his approach offered a better way of thinking about the uncertainty affecting monetary policy in Britain now.
Strong employment combined with very weak growth currently make it particularly hard for economists to reach reliable estimates of how much spare capacity is in the economy.
"Optimal policy depends on making judgements on the relative likelihood of different outcomes - it makes no more sense to just focus on the single most likely outcomes than it would in making decisions on buying insurance or crossing a road," he said.