Fiscal Compact has created new responsibilities in terms of quantitative
measures of excess demand in the economy. The concept of structural budget
balance is dependent on cycle values. As a consequence 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 an appropriate application of the Fiscal Compact. 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. We propose a solution that might contribute to solve this
problem that is clearly a crucial one for the PIIGS in times of crisis.
JEL Classification: C01,
E62, H30, H63.
deficit, output gap,
Cobb-Douglas production function filter, Beveridge and Nelson filter and Hodrick-Prescott