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Grupo de Estudos Monetários e Financeiros

Estudos do GEMF, N.º 15 de 2012


The Importance of a Good Indicator for Global Excess Demand

João Sousa Andrade
Faculdade de Economia da Universidade de Coimbra e GEMF

António Portugal Duarte
Faculdade de Economia da Universidade de Coimbra e GEMF

One of the primary responsibilities of economics is to build a good indicator of the magnitude of short term disequilibrium. Knowledge of the magnitude of the excess demand in the economy is essential for conducting fiscal and monetary policy. In a period of contraction when monetary policy is designed to control inflation, the excess demand measure is vital in constructing the concept of structural public budget balance, since the usual empirical concepts of output gap are not sufficiently well designed to give an accurate view of the negative excess demand when there are output breaks in the economy. The information produced by different quasi-official output gaps is quite often misleading, contributing to a rise in the unemployment rate, in the face of which policy-makers usually say “everything is all right, there nothing to be done”. We propose a solution that might contribute to solve this problem that is clearly a crucial one in times of crisis.

JEL Classification: C01, E62, H30.

Output Gap, Unemployment, Potential Output.

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