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A century of gaps

Author

Listed:
  • Mihnea Constantinescu

    (PrepayWay AG)

  • Anh Dinh Minh Nguyen

    (Bank of Lithuania & Faculty of Economics, Vilnius University)

Abstract

This paper considers the role of financial information in the estimation and dynamics of the US output gap over more than a century. To this end, we extend the parsimonious approach of Borio, Disyatat, and Juselius (2016, 2014) to allow for time-varying effects of financial factors. This novel feature significantly improves real-time estimates of the output gap. It signals the peak and trough in economic activity related to both the Great Recession and the Great Depression. Two major insights follow. Credit dynamics are the primary drivers of the observed financial crisis, albeit with different conduits over the century: the stock market in 1929 and the housing market in 2008. Accounting for credit growth, the US potential growth has been stable at 2% since the beginning of 1980.

Suggested Citation

  • Mihnea Constantinescu & Anh Dinh Minh Nguyen, 2018. "A century of gaps," Bank of Lithuania Working Paper Series 51, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:51
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    File URL: https://www.lb.lt/en/publications/no-51-mihnea-constantinescu-anh-d-m-nguyen-a-century-of-gaps
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    Citations

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    Cited by:

    1. Berger, Tino & Richter, Julia & Wong, Benjamin, 2022. "A unified approach for jointly estimating the business and financial cycle, and the role of financial factors," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).

    More about this item

    Keywords

    Potential Output; Output Gap; Kalman Filter; Real-Financial Cycle; Time-varying parameter;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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