Finance-neutral potential output: An evaluation in an emerging market monetary policy context |
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Authors: | J Sebastián Amador-Torres |
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Institution: | Banco de la República, Bogotá, Colombia |
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Abstract: | In this paper, output gaps that include financial cycle information are evaluated against policy analysis models used by the Colombian central bank. This is an important feature, 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 policymakers should employ it for comparison purposes. Also, the real-time policy performance of finance-neutral gaps is studied, separating suggested ex post from operational ex ante usefulness. The results suggest that finance-neutral gaps are neither more robust in real time nor more operationally useful than the benchmark estimates. These results have important implications for policymakers and for the relevant literature. |
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Keywords: | E44 E47 E52 E37 C53 Potential output Financial cycle Data Monetary policy Emerging economy |
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