Double Conditioned Potential Output

The central point of this paper is that both - internal and external - equilibria ought to be involved in theestimation of potential output. If only the data on inflation, unemployment rate and wages are used for itsevaluation, no certainty exists that such a level will correspond to a stable foreign trade balance.Our attempt is based on the following methodological assumptions:• the potential output is concomitantly associated with a constant inflation and sustainable relative foreign tradebalance (ratio of net export to gross domestic product);• all supply shocks affect this level, potential output being, therefore, a variable indicator;• consequently, the output gap reflects exclusively the demand pressure.The proposed computational algorithm comprises utilisation of orthogonal regression. It is exemplifiedon seasonally adjusted quarterly statistical series of the Romanian transition economy; this application shows thatthe output gap really contains significant regular and irregular cyclical components.