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Measuring Potential Output for the S outh A frican Economy: Embedding Information About the Financial Cycle
Author(s) -
Kemp Johannes Hermanus
Publication year - 2015
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/saje.12081
Subject(s) - potential output , economics , business cycle , output gap , financial market , finance , financial crisis , credit cycle , hodrick–prescott filter , financial accelerator , monetary economics , monetary policy , macroeconomics , dynamic stochastic general equilibrium
B orio et al . show that information embedded in the financial cycle can serve to improve measures of potential output and output gaps. They show that incorporating information on the financial cycle yields measures of potential output and output gaps for the U nited S tates, U nited K ingdom and S pain that are estimated more precisely and are more robust in real time. With its well‐developed financial markets and relatively open capital markets, the S outh A frican economy is potentially susceptible to the build‐up of the sort of financial imbalances that characterised the recent financial crisis. Using the framework developed in B orio et al ., a finance‐neutral measure of the output gap is estimated for S outh A frica. The traditional H odrick– P rescott filter is extended to incorporate information on credit and property prices. Including financial cycle proxies result in output gaps that are estimated more precisely and are more robust to data revisions and the arrival of new data points (i.e. estimated output gaps are more robust in real time), while also reflecting the impact of financial variables on economic activity. As such, the estimated finance‐neutral output gap seems to represent a more appropriate measure on which to base monetary policy decisions.