Sound macroeconomic policies helped Romania restore growth and narrow its output gap
after a deep and prolonged slump in the wake of the 2008 global crisis.
Surprisingly, the world output gap
factor even significantly explains the world factor in cyclically adjusted surplus measures, which indicates that OECD cyclical adjustments do not remove all business cycle variation in such measures.
The revision translates into nearly a 7 percentage-point difference in the output gap
We have also attempted to implement the expectations type Taylor rule which provides an insight to the policy makers to target inflation and output gap
in order to stabilise the economy.
The monetary policy committee noted "sluggish movements" in domestic demand and said the negative output gap
will remain "longer than anticipated.
The concepts of potential growth and the output gap
play a key role in the formulation and implementation of macroeconomic policies.
But, while the CBO sees the output gap
narrowing, it does not project that the economy will ever reach even the new, lower potential GDP "The assumption has always been that the U.
Figure 2 reproduces the inflation and output gap
consistent with the historical data as available up to 1970Q2, and staff forecasts for subsequent quarters as shown in the Greenbook.
But with the target due to be hit imminently, the guidance has been replaced with policy based on a more complex framework linking rates to the output gap
in the economy as measured by a series of 18 indicators.
If the FOMC's assurances that rates will remain low raise private individuals' expectations for future inflation and growth, then they will wish to consume more today, thereby lifting current aggregate demand and closing the output gap
(the gap between actual and potential economic output).
1) This will help accelerate the recovery, but it will still take time, with the output gap
not closing until 2017.
Despite the small pick-up in economic activity in Romania, especially on the production side of the economy, the central bank expects the large negative output gap
to persist, and to even deepen to below -3% by year-end, before recovering to around -2.