The Impact of Financial Factors on the Output Gap and Estimates of Potential Output Growth

Abstract

The literature on the finance–growth nexus highlights the importance of the financial cycle for the estimation of potential output of an economy. We estimate potential output growth for the G-5 countries, as well as for 10 high- and middle-income Asian economies, using a multivariate model that includes financial factors. We find that the latter have a positive and statistically significant effect on the output gap of the G-5 and high-income Asian economies, but not on that of the middle-income Asian economies. We also find that average potential growth of the economies included in the study is lower in 2008–2014 than in 2000–2007.