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Finance neutral potential output: an evaluation on an emerging market monetary policy context

Author

Listed:
  • J. Sebastián Amador-Torres

    (Banco de la República de Colombia)

Abstract
In this paper output gaps that include financial cycle information are evaluated against models used in policy analysis by the Colombian central bank. Employing this dataset is no trivial matter, since policy related models are the only relevant yardstick, and emerging economies (such as Colombia) have been historically more vulnerable to financial imbalances. Unlike previous works, finance neutral gaps were evaluated in a monetary policy context exactly as it is routinely performed by a central bank. The distribution of output gap revisions is analyzed, and a metric to compare real time robustness across models is developed. This metric constitutes a novel way to summarize the distribution of real time uncertainty around output gaps, and policy makers should employ it to compare different methods. Also the real time policy performance of finance neutral gaps is studied, separating suggested ex-post from operational ex-ante usefulness. Results suggest finance neutral gaps are neither more robust in real time nor more operationally useful than the benchmark estimates. This implies that policy makers should consider uncertainty to the extent that it affects the estimations real time forecasting capabilities.

Suggested Citation

  • J. Sebastián Amador-Torres, 2016. "Finance neutral potential output: an evaluation on an emerging market monetary policy context," Borradores de Economia 958, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:958
    DOI: 10.32468/be.958
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    Cited by:

    1. Lin, Hongbo & Zhang, Xiaoling & Chen, Zhenling & Zheng, Heyun, 2020. "Estimating the potential output and output gap for China's coal cities with pollutants reduction," Resources Policy, Elsevier, vol. 68(C).
    2. J. Sebastián Amador-Torres, 2018. "New Keynesian NAIRU and the Okun Law: An application for Colombia," Borradores de Economia 1034, Banco de la Republica de Colombia.
    3. Guillochon, Justine & Le Roux, Julien, 2023. "Unobserved components model(s): output gaps and financial cycles," Working Paper Series 2832, European Central Bank.

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    More about this item

    Keywords

    Potential output; financial cycle; real-time data; monetary policy; emerging economy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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