OUTPUT GAP AND SHOCKS DYNAMICS. THE CASE OF ROMANIA*

by Scutaru, Cornelia and Stanica, Cristian Nicolae
Published in Romanian Journal of Economic Forecasting, 2005, volume 6 issue 4, 25-43

Abstract

This paper is organized in two parts, an overview of the evolution of inflation, highlighting the factors that influenced the persistent inflation in Romania, and a VAR model for the impulse analyses. The purpose of the paper is to present an efficient instrument for simulating and researching the short-term impact of the changes in money, foreign exchange and the impact of external shocks (such as international price of oil) on the development of inflaThis paper evaluates the output gap and the effects of the inflationist shocks to the Romanian economy. We use an extension of the Blanchard-Quah decomposition with three variables: the real output, the unemployment rate and the inflation. Three types of shocks are evaluated: the productivity shocks (on the supply side), the adverse shocks in the labor market and the adverse shocks in the goods and services market (inflationist shocks). The seasonal pattern of the data regarding the quarterly GDP imposes a deseasonalised approach. The analysis of the dynamics of the shocks is confirmed by the real evolutions in the Romanian economy over the period 1994-2003; also a Phillips relationship between inflation and unemployment is emphasized. The conclusions confirmed the relevance of the labor market shocks and the productivity shocks upon unemployment. The equilibrium was reached in about 4 years – as in the case of the output. As regards the productivity shocks, it was found that they did not have relevance on the market of goods and services.
(*Paper prepared within the CERGE-EI project RRC IV-057 “Adapted models to estimate potential GDP in the candidate countries”, 2005).

Keywords: output-gap, potential GDP, VAR models, Blanchard-Quah decomposition, impulse-response function
JEL Classification: C22, C51, P24