Description

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.

More publications in this series: Working Papers

More publications by: Helge Berger ; Thomas Dowling ; Sergi Lanau ; Mico Mrkaic ; Pau Rabanal ; Marzie Taheri Sanjani