Finance, asset prices, and the business cycle: evidence on the reliability of real-time output gap estimates

This paper examines the role of finance and asset prices in enhancing the real-time reliability of output gap estimates. In a structural unobserved components model, financial indicators are embedded in the cyclical component alongside unemployment and inflation. The results show that incorporating finance and asset prices not only explains a large share of cyclical fluctuations in economic output but also improves real-time reliability by producing estimates that are less prone to ex-post revisions.