New Methods for Incorporating Financial Factors in Estimating Potential Output

Macroeconomic theory posits that GDP growth cannot continuously exceed its long-run sustainable level, a level commonly referred to as potential output. Potential output is commonly estimated by combining GDP data with information contained in the rate of inflation.
The recent financial crisis has challenged the existing framework by suggesting that financial factors such as excess credit and high house prices should be included in defining what can be considered sustainable, and if so, should be used to aid the calculation of potential output.
The goal of the project is to develop methods and measures of what should be considered sustainable when considering financial factors. The project will provide insights on the interplay between financial conditions and the macroeconomy, and provide institutions such as the Reserve Bank of Australia, the Deutsche Bundesbank and the European Central Bank tools for their policy deliberations.