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Steady as She Goes—Estimating Potential Output During Financial “Booms and Busts”

Author

Listed:
  • Helge Berger
  • Thomas Dowling
  • Sergi Lanau
  • Mico Mrkaic
  • Pau Rabanal
  • Marzie Taheri Sanjani

Abstract

Potential output—in the sense of the GDP level or path an economy can sustain over the medium term—is a crucial benchmark for policymakers. However, it is difficult to estimate when financial “booms and busts” are driving the real economy. This paper uses a simple multivariate filtering approach to illustrate the role financial variables play in driving potential or sustainable output. The results suggest that it moves more steadily during financial “boom and bust” periods than implied by conventional HP filter estimates, which tend to more closely follow actual GDP. A two-region, multisector New Keynesian DSGE model with financial frictions sheds light on the economic forces that could be behind the results obtained from the filter. This has important implications for policymakers.

Suggested Citation

  • Helge Berger & Thomas Dowling & Sergi Lanau & Mico Mrkaic & Pau Rabanal & Marzie Taheri Sanjani, 2015. "Steady as She Goes—Estimating Potential Output During Financial “Booms and Busts”," IMF Working Papers 15/233, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/233
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    References listed on IDEAS

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    Cited by:

    1. Lucian Croitoru, 2016. "Are We Systematically Wrong when Estimating Potential Output and the Natural Rate of Interest?," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 128-151, June.
    2. Grintzalis, Ioannis & Lodge, David & Manu, Ana-Simona, 2017. "The implications of global and domestic credit cycles for emerging market economies: measures of finance-adjusted output gaps," Working Paper Series 2034, European Central Bank.
    3. Deba Prasad Rath & Pratik Mitra & Joice John, 2017. "A Measure of Finance-Neutral Output Gap for India," Working Papers id:11986, eSocialSciences.
    4. Pau Rabanal & Marzie Taheri Sanjani, 2015. "Financial Factors; Implications for Output Gaps," IMF Working Papers 15/153, International Monetary Fund.
    5. International Monetary Fund, 2015. "IMF Multi-Country Report; Housing Recoveries: Cluster Report on Denmark, Ireland, Kingdom of the Netherlands—the Netherlands, and Spain," IMF Staff Country Reports 15/1, International Monetary Fund.
    6. Bjarni G. Einarsson & Kristófer Gunnlaugsson & Thorvardur Tjörvi Ólafsson & Thórarinn G. Pétursson, 2016. "The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles," Economics wp72, Department of Economics, Central bank of Iceland.

    More about this item

    Keywords

    Potential output; Credit; Output gap; variables; gdp; demand; Financial Markets and the Macroeconomy; Model Construction and Estimation; Estimation; All Countries;

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