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Estimating Europe’s Natural Rates from a forward-looking Phillips curve

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  • T. BERGER

Abstract

This paper re-estimates potential output, the NAIRU, and the core inflation rate using aggregated euro area data. The empirical model consists of a Phillips curve linking inflation to unemployment. An Okun-type relationship is used to link the output gap to cyclical unemployment. Using recent developments in the field of New Keyenesian economics, the Phillips curve is forward-looking. The model further accounts for new developments in unobserved component models by allowing (i) for correlation between shocks to the trend and the cycle and (ii) structural breaks in the drift of potential output.

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  • T. Berger, 2008. "Estimating Europe’s Natural Rates from a forward-looking Phillips curve," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/498, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:08/498
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