Rethinking Potential Output: Embedding Information about the Financial Cycle

Claudio Borio, Piti Disyatat and John Juselius

No 5, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

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.

Keywords: Potential output; output gap; financial cycle; inflation; Phillips curve; monetary policy (search for similar items in EconPapers)
JEL-codes: E10 E40 E44 E47 E52 E60 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2015-09
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Rethinking potential output: embedding information about the financial cycle (2017)
Working Paper: Rethinking potential output: Embedding information about the financial cycle (2013)
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