Steady as She Goes-Estimating Potential Output During Financial 'Booms and Busts'

34 Pages Posted: 5 Jan 2016

See all articles by Helge Berger

Helge Berger

International Monetary Fund (IMF)

Thomas Dowling

International Monetary Fund (IMF) - Western Hemisphere Department

Sergi Lanau

International Monetary Fund (IMF)

Weicheng Lian

International Monetary Fund (IMF)

Mico Mrkaic

International Monetary Fund (IMF)

Pau Rabanal

International Monetary Fund

Marzie Taheri Sanjani

International Monetary Fund (IMF)

Date Written: November 2015

Abstract

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.

Keywords: Output gap, variables, gdp, demand, Financial Markets and the Macroeconomy, Model Construction and Estimation, Estimation, All Countries,

JEL Classification: -;- C13, C51, E44, E32

Suggested Citation

Berger, Helge and Dowling, Thomas and Lanau, Sergi and Lian, Weicheng and Mrkaic, Mico and Rabanal, Pau and Taheri Sanjani, Marzie, Steady as She Goes-Estimating Potential Output During Financial 'Booms and Busts' (November 2015). IMF Working Paper No. 15/233, Available at SSRN: https://ssrn.com/abstract=2711142

Helge Berger (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Thomas Dowling

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Sergi Lanau

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Weicheng Lian

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Mico Mrkaic

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Pau Rabanal

International Monetary Fund ( email )

700 19th Street NW
Washington, DC 20431
United States

Marzie Taheri Sanjani

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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