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

By Helge Berger, Thomas Dowling, Sergi Lanau, Mico Mrkaic, Pau Rabanal, Marzie Taheri Sanjani

November 9, 2015

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Format: Chicago

Helge Berger, Thomas Dowling, Sergi Lanau, Mico Mrkaic, Pau Rabanal, and Marzie Taheri Sanjani. Steady as She Goes—Estimating Potential Output During Financial “Booms and Busts”, (USA: International Monetary Fund, 2015) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Credit, Economic theory, Financial frictions, Housing prices, Money, Output gap, Potential output, Prices, Production

Keywords: Boom and bust, Credit, Financial frictions, Global, House price, Housing price movement, Housing prices, MVF output gap, MVF-implied output gap, Output gap, Potential output, Spain output gaps estimate, Spain output gaps from a MVF Model, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/233
Stock No:

WPIEA2015233
ISBN:

9781513503271
ISSN:

1018-5941

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