To reach its potential Romania needs to “relax”

I am not a fan of “output gaps”, this measure of how much are resources in the economy employed. But central banks all over the world use it and thus we have to at least mention it.
In theory an output gap shows how far is the economy from its potential. A positive gap means that current GDP is above its long term potential while a negative one shows that the opposite.

Romania has to decide: with or without monetary policy

Romania has never embraced Inflation Targeting whole heartedly. It is not just the inflation outcome that says that it is also the design of the policy. The NBR has gone out of the way to create a list of reasons for why inflation target could not be achieved. Even more, the NBR research and that of few local economists has gone to great length to show that due to an unobservable but somehow measurable effect, the Ballassa-Samuelson, inflation could not fall below some certain level and the disinflation process would be long and arduous. I spoke about those here and here.
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Alternative view of falling inflation in Romania

Starting with August this year NBR is forecasting lower and lower inflation. The latest forecast puts inflation at 1.9% in 1Q2012, at 2.3% in 2Q2012 and at 2.8% in 2013. During this period inflation reaches 3.8% in 3Q2012 and then stabilizes around 3%. Everyone in Romania should celebrate these numbers. Before we bring out the champagne I have two question.
What happened to the Ballasa-Samuelson effect?
Could the 50% cut in potential GDP explain these inflation numbers?

D-day for economic history

Today I will start posting in the “Understanding October 2008/Romania” category. Why today? Because is the day that started it all.

Intro

Remember, remember October 2008…

This is the month that marks the beginning of the current economic slump in recent Romanian economic history.  At that time a multitude of theories were thrown around for who’s to blame and what were the right reactions in times of crisis.

Thus there are two research teams deriving from that situation and I will do my best to shed some light on them: how we got to 2008 and policy reactions to the 2008 negative external shock. There is no particular order in which I will “attack” the two subject, it all depends on which part of the research moves faster.

The format will be simple, in this page you will find links to new research as I complete it.  I welcome any research on those subjects done by anyone.  To me, uncovering as much as possible of the truth regarding that episode is similar to understanding the Great Recession in the US.

The first research that looked at this issue came from Lucian Croitoru at National Bank of Romania. Unfortunately the paper is in Romanian and it cannot receive the proper peer review. This paper promoted a discussion in the media where I presented (video here) my first perspective on the issue.

But this is a too interesting and important of a topic to leave it here.