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Traditional and New Keynesian Dynamic Models for Potential Output and Inflation Rate

Author

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  • Paolo Bonomolo

    () (“Luigi Bocconi” University of Milan)

Abstract

This paper uses the Kalman filter to estimate potential output as a latent process. We estimate two Dynamic Linear Models, comparing the results obtained through a traditional and a New Keynesian model. We verify that the traditional measures of output gap, even if usually applied in the estimation of the New Keynesian Phillips curve, are not consistent with the theory. We propose a New Keynesian measure that overcomes this limit. We suggest it as an alternative to the use of marginal costs.

Suggested Citation

  • Paolo Bonomolo, 2009. "Traditional and New Keynesian Dynamic Models for Potential Output and Inflation Rate," Rivista di Politica Economica, SIPI Spa, vol. 99(4), pages 65-88, OCTOBER-D.
  • Handle: RePEc:rpo:ripoec:v:99:y:2009:i:4:p:65-88
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    More about this item

    Keywords

    Kalman filter; new Keynesian Phillips curve; output gap; unobserved component;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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