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Output-gaps in the PIIGS Economies: An Ingredient of a Greek Tragedy

  • João Sousa Andrade

    ()

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

  • António Portugal Duarte

    ()

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

The 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.

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Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2014-06.

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Length: 32 pages
Date of creation: Jan 2014
Date of revision:
Publication status: Published in International Journal of Academic Research in Economics and Management Sciences 3(1): 159-179, 2014.
Handle: RePEc:gmf:wpaper:2014-06.
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