Monetary Policy And Key Unobservables: Evidence From Large Industrial And Selected Inflation-Targeting Countries

Among the variables that play critical roles in the design of monetary policy, several are unobservable. These include such key variables as the neutral real rate of interest, the output gap, and the natural rate of unemployment. While individual central banks have undertaken efforts to estimate these unobservables, the approaches have generally been country specific and have not provided either systematic estimation or comparison across countries. We adopt a common estimation approach, applied to a parsimonious monetary-policy model, to provide consistent estimates of key unobservables for the U.S., the Eurozone, and Japan, and several inflation-targeting countries: Australia, Canada, Chile, New Zealand, Norway, Sweden, and the U.K. Doing so allows us to obtain comparable measures of unobservables across a range of countries. We exploit our estimates to investigate issues of commonalities and convergence across countries in these key but unobservable variables.