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

_IMF Working Papers, November 9, 2015_

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## Bibliographic details
- Authors: Helge Berger, Thomas Dowling, Sergi Lanau, Mico Mrkaic, Pau Rabanal, Marzie Taheri Sanjani
- Published: November 9, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513503271.001

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### Summary
- Potential output—in the sense of the GDP level or path an economy can sustain over the medium term—is presented as a crucial benchmark for policymakers.
- The paper addresses difficulty in estimating potential output when financial “booms and busts” are driving the real economy.
- Uses a simple multivariate filtering approach to illustrate the role financial variables play in driving potential or sustainable output.
- Results suggest potential output 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 is used to shed light on economic forces behind the filter results.
- The findings are described as having important implications for policymakers.

### Methodology and Key Findings
- Method: simple multivariate filtering approach (MVF) incorporating financial variables to estimate potential or sustainable output.
- Comparative finding: MVF-implied potential output is steadier during financial “boom and bust” periods relative to estimates from the conventional HP filter.
- Conventional HP filter estimates tend to more closely follow actual GDP, implying larger short-run fluctuations in estimated potential output during financial cycles.

### Theoretical Framework
- Model used: two-region, multisector New Keynesian DSGE model with financial frictions.
- Purpose of model: to illuminate economic forces that could generate the steadier potential output implied by the multivariate filter results.

### Policy Implications
- The steadier MVF-implied potential output during financial cycles has important implications for policymakers (implicit: assessment of output gaps, cyclical policy settings, and financial-stability-informed macroeconomic policy).

### Subjects and Keywords
- Subjects: 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

*Source: IMF Working Paper "Steady as She Goes—Estimating Potential Output During Financial “Booms and Busts”", November 9, 2015.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/steady-as-she-goes-estimating-potential-output-during-financial-booms-and-busts-43383_