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October 31, 2018
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The workhorse framework of macroeconomics and monetary policy relies on the build-up of inflationary pressures across the cycle as the economy tightens, and firms have no choice but to raise wages, which ultimately lifts consumer prices. Within that narrative, the estimation of slack in the economy – the output gap – is crucial to monetary policy authorities. A positive output gap means that the economy is away from its long-term steady-state equilibrium, and unsustainable cost pressures are building up. Currently, the OECD / IMF / European Commission estimate of the output gap in the euro-area is slightly positive and reaching close to 1% by the end of next year. [more]
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