Embedding Liquidity Information in Estimating Potential Output

This paper analyzes and extends the original study by Borio (2013), which includes proxies for the financial cycle in the process for estimating potential output. We extend the estimation to more countries (USA, UK, Spain, Italy, France, Austria, Netherlands and Switzerland) to check the robustness of the original method, and propose short-term debt as a new proxy for liquidity. We confirm that "finance neutral" measures of potential output are more reliable even though the original proxies are not particularly robust across countries, and that including liquidity information in the estimation process (whose analysis is conducted for United States, Australia and Canada) leads to better estimates, that are significant in all of the countries we analyze.