Unemployment or credit: Which one holds the potential? Results for a small open economy with a low degree of financialization |
| |
Authors: | Mihnea Constantinescu Anh DM Nguyen |
| |
Institution: | 1. Economics Department, Bank of Lithuania, Lithuania;2. Economics Department, Bank of Lithuania and Faculty of Economics, Vilnius University, Vilnius, Lithuania |
| |
Abstract: | This paper investigates the relative importance of unemployment versus credit in determining the potential level of real activity for a small open economy with a low degree of financialization. We use a multivariate unobserved component model (MUC) to derive the potential output and the associated output gap for the Lithuanian economy. The model is estimated via Bayesian methods and the time paths of unobserved variables are extracted via the Kalman filter. The inclusion of unemployment in the MUC model substantially improves the estimates of the output gap in real time. Adding information about credit further emphasizes the overheating of the economy in the pre-crisis period, both in real time and ex post. Including credit preserves the conclusions regarding turning points. We uncover a strong negative correlation between the model-implied unemployment gap (without accounting for credit) and real credit growth. Data revisions do not appear to be the primary source of revisions of output gap estimates. |
| |
Keywords: | C11 C32 E24 E32 Potential output Output gap Multivariate unobserved component Kalman filter NAIRU Real financial cycle Small open economy |
本文献已被 ScienceDirect 等数据库收录! |