BIS paper urges inclusion of financial cycle in output gap calculation


A working paper published by the Bank for International Settlements on February 27 suggests traditional measures of the output gap may be causing policy-makers to overlook dangerous imbalances building in the economy.

In the paper, Rethinking potential output: Embedding information about the financial cycle, Claudio Borio, Piti Disyatat and Mikael Juselius develop measures of potential output and output gaps in which financial factors "play a central role".

They show that traditional measures of

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