Estimating the natural rates in a simple New Keynesian framework

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Estimating the natural rates in a simple New Keynesian framework

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Hilde C. Bjørnland () (Norwegian School of Management (BI) and Norges Bank (Central Bank of Norway))
Kai Leitemo (Norwegian School of Management (BI))
Junior Maih (Norges Bank (Central Bank of Norway))

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Abstract

The time-varying natural rate of interest and output and the implied mediumterm inflation target for the US economy are estimated over the period 1983-2005. The estimation is conducted within the New-Keynesian framework using Bayesian and Kalman-filter estimation techniques. With the model-consistent estimate of the output gap, we get a small weight on the backward-looking component of the New-Keynesian Phillips curve – similar to what is obtained in studies which use labor share of income as a driver for inflation (e.g., Galì et al., 2001, 2003). The turning points of the business cycle are nevertheless broadly consistent with those of CBO/NBER. We find considerable variation in the natural rate of interest while the inflation target has been close to 2% over the last decade.

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Paper provided by Norges Bank in its series Working Paper with number 2007/10.

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Length: 33 pages
Date of creation: 11 Jan 2008
Date of revision:
Handle: RePEc:bno:worpap:2007_10

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-03-01 (All new papers)
NEP-MAC-2008-03-01 (Macroeconomics)

Cited by:
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Castelnuovo , Efrem & Greco , Luciano & Raggi, Davide, 2008. "Estimating regime-switching Taylor rules with trend inflation," Research Discussion Papers 20/2008, Bank of Finland. [Downloadable!]
Taboga, Marco, 2007. "Structural change and the bond yield conundrum," MPRA Paper 4965, University Library of Munich, Germany. [Downloadable!]

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