Events

06.10.2014
Financial cycles and their implications for fiscal policy

Speaker: Mikael Juselius (BoF)

Location and time:  NBS Conference Hall; 11:00 - 13:00

Abstract:

This paper argues that incorporating information about the financial cycle is important to improve measures of potential output and output gaps. Conceptually, identifying potential output with non-inflationary output is too restrictive. Potential output is seen as sustainable; yet experience indicates that output may be on an unsustainable path even if inflation is low and stable whenever financial imbalances are building up. More generally, as long as potential output is identified with the non-cyclical component of output fluctuations and financial factors play a key role in explaining the cyclical part, ignoring these factors leaves out valuable information. Within a simple and transparent framework, we show that including information about the financial cycle can yield measures of potential output and output gaps that are not only estimated more precisely, but also much more robust in real time. In the context of policy applications, such "finance-neutral" output gaps are shown to yield more reliable estimates of cyclically adjusted budget balances and to serve as complementary guides for monetary policy.

Documents:

Rethinking potential output: Embedding information about the financial cycle 

A parsimonious approach to incorporating economic information in measures of potential output r 

About the speaker:

Mikael Juselius
   


Mikael Juselius is an economist at the Bank of Finland. He holds a PhD from Hanken School of Economics in Helsinki, where he also has a permanent position as an associate professor. His main field of expertise is in applied time-series econometrics where, among others, he has written about market delineation and how to test rational expectations models. His current research focuses on the real effects of private sector credit and the interaction between monetary policy and financial stability.


Here is a link to the Ideas Repec page.