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Double conditioned potential output

Dobrescu, Emilian (2004): Double conditioned potential output. Published in: Romanian Journal of Economic Forecasting No. Paper presented at the 28th General Conference of The International Association for Research in Income and Wealth Cork, Ireland, August 22 - 28, 2004

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Abstract

The central point of this paper is that both - internal and external - equilibria ought to be involved in the estimation of potential output. If only the data on inflation, unemployment rate and wages are used for its evaluation, no certainty exists that such a level will correspond to a stable foreign trade balance. Our attempt is based on the following methodological assumptions: • the potential output is concomitantly associated with a constant inflation and sustainable relative foreign trade balance (ratio of net export to gross domestic product); • all supply shocks affect this level, potential output being, therefore, a variable indicator; • consequently, the output gap reflects exclusively the demand pressure. The proposed computational algorithm comprises utilisation of orthogonal regression. It is exemplified on seasonally adjusted quarterly statistical series of the Romanian transition economy; this application shows that the output gap really contains significant regular and irregular cyclical components.

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