Abstract. This paper aims to assess the impact of financial variables on output gap in a group of middle-income Asian countries such as India, Indonesia, Republic of Korea, Malaysia, and Thailand. In order to improve on the previous methodologies, this study followed a different approach by considering a binary nature of dependent variable. In order to explore role of credit guarantee, this paper considered credit guarantee to credit offtake ratio as an explanatory variable in defining output gap. Moreover, in order to get a clear picture on influence of monetary and fiscal policy, we have included revenue deficit and debt to GDP ratio along with real interest rate and inflation rate. Our Probit model ultimately proves that credit guarantee is an important factor for identifying output gap. Additionally, output gap is found to be neutral towards the movement of other financial variables.

Keywords: output gap, GDP, credit guarantee, financial variable, Asia.