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Finance-neutral potential output: An evaluation in an emerging market monetary policy context

Amador-Torres, J. Sebastián
Authors registered in the RePEc Author Service: J. Sebastián Amador-Torres ()

Economic Systems, 2017, vol. 41, issue 3, 389-407

Abstract: In this paper, output gaps that include financial cycle information are evaluated against policy analysis models used by the Colombian central bank. This is an important feature, since policy-related models are the only relevant yardstick and emerging economies (such as Colombia) have been historically more vulnerable to financial imbalances. Unlike previous works, finance-neutral gaps were evaluated in a monetary policy context exactly as it is routinely performed by a central bank. The distribution of output gap revisions is analyzed and a metric to compare real-time robustness across models is developed. This metric constitutes a novel way to summarize the distribution of real-time uncertainty around output gaps, and policymakers should employ it for comparison purposes. Also, the real-time policy performance of finance-neutral gaps is studied, separating suggested ex post from operational ex ante usefulness. The results suggest that finance-neutral gaps are neither more robust in real time nor more operationally useful than the benchmark estimates. These results have important implications for policymakers and for the relevant literature.

Keywords: Potential output; Financial cycle; Data; Monetary policy; Emerging economy (search for similar items in EconPapers)
JEL-codes: E44 E47 E52 E37 C53 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Finance neutral potential output: an evaluation on an emerging market monetary policy context (2016) Downloads
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