Finance Neutral Output Gap Estimates for the Netherlands: Does it improve the real-time usability?

Abstract

In this paper the hypotheses set by Borio, Sisyatat and Juselius (2013), extending the conventional HP-filter with financial cycle information increase the real- time robustness of output gap estimates, is tested. For the first time, real-time finance neutral output gaps are estimated for the Netherlands. A new constructed quarterly database is used for this purpose. Results confirm that finance neutral output gap estimates are more robust real-time relative to HP-filtered output gaps: Including financial cycle information does improve the real-time reliability and thereby the usefulness for policy makers. However, these improvements are small in magnitude and not robust during the recent global financial crisis. Considering the general drawbacks of the finance neutral approach and the specific results found in this specific paper, the by Borio et al. (2013) proposed approach is above all usable as a starting point for future research. It certainty should not be used as an omniscient instrument and neglecting other output gap estimation methods and supplementary indicators.