The relative weight given to the output gap is denoted by the Greek letter lambda.
They then calculated the correlations between Germany's output gap and the rest (see chart).
Any time the economy's growing faster than trend, that output gap is shrinking.
As argued above, this should not affect the size of the output gap.
As long as a big output gap remains, downward pressure on inflation will persist even if growth perks up.
Given sufficient resolve, the government has the means to close the output gap.
We expect rising inflation in H1 2013 as policy easing pushes growth above 8 percent and widens the output gap.
"We are seeing an output gap based on overcapacity in the economy, " explained Chad Cunningham, CIO for IronHorse Capital Management.
So we don't see inflation staying flat as long as those who follow just the existence of the output gap believe.
But now most economists reckon it will be no bigger than 2%, meaning that the euro area's output gap will widen.
He supposes that the central bank wants to minimise the weighted sum of the square of the inflation gap and the square of the output gap.
Monetarists downplay the output gap and focus instead on the vast amount of money that has been created as central banks buy bonds or extend loans to banks.
Then America's output gap was small and unemployment was falling.
But Germany's inflation rate is only 1% and it could well drop over the next year, as weaker growth causes its output gap to widen by more than elsewhere.
Earlier this year, staff at the Federal Reserve also marked down their estimate of the country's potential GDP and the output gap in response to the surprisingly steep drop in unemployment.
Yet Bernanke seems to possess some Keynesian baggage, using such nomenclature as "aggregate demand, " "core inflation, " "potential output" and "output gap, " as though the economy were made up of interchangeable parts.
We also thought they would probably cut or leave unchanged their estimate of spare capacity in the economy (the "output gap") - again, on the basis of their calculations in March.
This would resolve all these puzzles: GDP growth of 2.5% is above, not at, trend, the output gap is closing, and it was probably smaller than we thought to begin with.
In particular, the Bank of Japan thinks that the output gap between what the economy can produce and what it is actually producing is narrowing quite fast, raising the prospect of imminent inflationary pressures.
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" In explaining this, they say - in effect - that they looked at what the output gap would be, on the basis of their previous "cyclical indicators' approach, and decided it wasn't plausible.
Martin Barnes of Bank Credit Analyst, a research firm, points out that the direction of official policy (low rates, quantitative easing, big deficits) looks inflationary but the economic fundamentals (a big output gap, sluggish credit growth) look deflationary.
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However, the uncertainty about the valuation of asset prices is arguably no greater than the uncertainty about potential growth rates and hence the size of the output gap, which is at the heart of most central banks' inflation forecasts.
Interestingly, there is also a Plan C spelled out, if low growth is combined with high inflation - because we've underestimated the long-term damage done by the crisis (ie over-estimated the output gap) - hike interest rates and increase austerity.
It is easy to see what Bernanke is missing: he thinks that low growth and high unemployment create some undefinable something called an output gap, which leads to other undefinables called resource slackness, and these undefinables protect us from inflation.
That output gap is fast closing.
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Chinese production will fill much of any global aluminum output gap, but support nevertheless will come from a lack of cheap energy and environmental and political issues, including the time it takes to build a smelter in Western nations, Vazquez said.
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The UBS report explains that while nuclear energy has suffered a powerful blow, and it is not clear when and how it will get back on its feet, GE will benefit, despite having built the generators, as its strong gas turbine business, along with its smaller renewable portfolio, will step in to cover the output gap generated from a diminishing inventory of nuclear power plants.
Hayek was managing to close the gap between manufacturing output and real-time market demand.
In any case, so long as growth is below long-term trend, the gap between actual and potential output will continue to grow, easing inflationary pressure.
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