Since potential GDP and the GDP gap, major information variables, cannot be actually observed in the course of implementing macroeconomic policies, they have been estimated through various methods, and the orthodox estimation methods have been drawn up mainly in terms of stable inflation. A recognition, however, has been spreading that stable inflation cannot guarantee the sustainability of growth, judging from the experience of intensified financial imbalances causing the Global Financial Crisis, even though inflation was low and stable from the mid-2000s onward.

  This paper introduces the concepts of financially-neutral potential GDP and GDP gap, while simultaneously taking into consideration of both inflation and financial stability, and it also presents a method of setting up the model. Furthermore, it offers implications by estimating Korea’s financially-neutral GDP gap through a production function approach and a latent factor model, and comparing the estimate with orthodox methods.

  According to the results of the analysis, Korea’s financially-neutral GDP gap showed a substantial difference from the GDP gap estimated by the conventional manner immediately after the global financial crisis and in the mid-2000s. This implies that, with financial stability being also taken into consideration, a more boldly accommodative monetary policy was called for immediately after the financial crisis as was a tighter macroeconomic policy in the mid-2000s. However, as the difference between the actual GDP gap and the conventional estimate was not as large as that of those advanced countries where the global financial crisis started, the financial distortions in Korea are seen to have been less significant. Moreover, since inflation is given greater emphasis in the latent factor model added by the Phillips curve and in the production function approach, the GDP gap calculated according to these methods is close to the estimate given by the current method.