The impact of asset prices and bank lending should be taken into account when calculating the potential economic growth as financial instability tends to amplify the depth of an economic crisis, a central bank report showed Friday.
The report from the Bank of Korea said that there is the need to calculate the potential GDP by including financial factors such as asset prices and bank lending as the output gap could be miscalculated when inflation remains low.
The output gap refers to the difference between actual gross domestic product and potential GDP, or the maximum possible growth rate at which an economy can grow without triggering inflation. Korea's potential GDP is estimated to remain in the 3.3 percent to 3.8 percent range.
Current methods of measuring the potential GDP focus on changes in inflation. But in the aftermath of the 2008 global financial crisis, the concept of financial stability has become important in implementing macroeconomic policies.
If the impact of financial stability, along with inflation, was taken into account, there might have been the need to actively take accommodative stance right after the 1997-98 Asian financial crisis while policymakers should have taken a tighter policy stance after the mid-2000s.
The report said that if a crisis results from the financial sector, policymakers need to take a more aggressive accommodative stance as the economic downturn tends to be severe in such a case.
The BOK said earlier that the GDP gap remains in negative territory, but it will gradually narrow, indicating that demand-pull inflationary pressure will rise due to the economic recovery. (Yonhap)