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Estimating the natural rates in a simple New Keynesian framework

  • 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))

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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