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Estimating the natural rates in a simple New Keynesian framework

  • Hilde Bjørnland


  • Kai Leitemo


  • Junior Maih


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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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 40 (2011)
Issue (Month): 3 (May)
Pages: 755-777

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Handle: RePEc:spr:empeco:v:40:y:2011:i:3:p:755-777
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