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.
