The main indicator of current state of the economy is the output gap
; positive values of the output gap
reflect boom in economic activity while negative values portray recession.
0] are the optimal inflation rate and output gap
t+1] and the forecast for the output gap
in the next quarter, output [gap.
On the other hand, Nobay and Peel (2003) find deflation bias in output gap
and do not find any significant signs of inflation bias while deriving optimal monetary policy reaction function.
The variables used in this study are real money demand (M1) and real money supply (M1), nominal interest rate, real GDP, exchange rate (PAK/USD), inflation gap and output gap
The output gap
is an obvious candidate to explain cyclically unadjusted surpluses.
The resulting indicators may be interpreted, in an economic sense, as metrics of sustainable (ie not associated with the build-up of imbalances) output and the output gap
where PR is an "interest-rate smoothing" parameter (0 < [rho]R < 1), representing the gradual response of interest rates to inflation and the output gap
The output gap
based on Doh's measure implies the economy was operating well above its potential level in 2007, the year before the financial crisis, and had less spare capacity at the end of 2013 than the CBO measure implies.
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).
Here is a sampling of OECD projections on how the economies of member countries will do next year, as measured by output gap
-- which is the difference between an economy's actual GDP and its potential GDP -- according to the (http://www.
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.