Improved output gaps with financial cycle information? An application to G7 countries’ new Keynesian Phillips curves

Johanna Amberger, Ralf Fendel and Hanno Stremmel

Applied Economics Letters, 2017, vol. 24, issue 4, 219-228

Abstract: In search for more robust cyclical imbalance indicators, recent research has highlighted the interactions between business and financial cycles. Output gap formulations increasingly take imbalances of the financial cycle into account, postulating finance-neutral output gaps (FNGAPs). To test their increased explanatory power in econometric models, we compare FNGAPs to univariate output gaps in their ability to explain inflation dynamics in hybrid new Keynesian Phillips curves. Results indicate FNGAPs to exercise (dis)inflationary pressure, but not to outperform traditional output gaps. Nonetheless, they have become increasingly significant in the course of the 2007/08 Global Financial Crisis.

Date: 2017
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DOI: 10.1080/13504851.2016.1178840

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