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The Importance of a Good Indicator for Global Excess Demand

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  • João Sousa Andrade

    ()
    (GEMF and Faculty of Economics, University of Coimbra)

  • António Portugal Duarte

    ()
    (GEMF and Faculty of Economics, University of Coimbra)

Abstract

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.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2012-15.

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Length: 32 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:gmf:wpaper:2012-15

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Keywords: financial Output gap; unemployment; potential output.;

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