Rethinking potential output: embedding information about the financial cycle

Claudio BorioBy, Piti Disyatat and John Juselius

Oxford Economic Papers, 2017, vol. 69, issue 3, 655-677

Abstract: This paper argues that information about the financial cycle should be incorporated in measures of potential output. Identifying potential output with non-inflationary output is too restrictive given that growing financial imbalances can place output on an unsustainable path even if inflation is low and stable. We propose a simple and transparent framework to accommodate information about the financial cycle in constructing output gap estimates. Applied to US data, our approach yields measures of potential output that are not only estimated more precisely, but also much more robust in real time. Inflation, by comparison, carries very little information that can be exploited to infer potential output.

JEL-codes: E40 E47 E50 E52 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (42)

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Related works:
Working Paper: Rethinking Potential Output: Embedding Information about the Financial Cycle (2015)
Working Paper: Rethinking potential output: Embedding information about the financial cycle (2013)
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