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2006•Unpublished venueRequires access

Estimating the Natural Rates in the New Keynesian Framework

Hilde C. Bjørnland, Kai Leitemo, Junior Maih

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Abstract

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. While there is considerable variation in the natural rate of interest, the inflation target estimate is close to 2% over the last decade. Employing 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 studies which use labor share of income as a proxy for marginal costs (e.g., Gaĺi et al., 2001, 2003). Model-consistency may therefore be a requirement if the output gap estimate shall represent marginal costs efficiently. JEL-codes: C51, E32, E37, E52.

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What this paper is about

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. While there is considerable variation in the natural rate of interest, the inflation target estimate is close to 2% over the last decade. Employing 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 studies which use labor share of income as a proxy for marginal costs (e.g., Gaĺi et al., 2001, 2003). Model-consistency may therefore be a requirement if the output gap estimate shall represent marginal costs efficiently. JEL-codes: C51, E32, E37, E52.

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Available abstract

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. While there is considerable variation in the natural rate of interest, the inflation target estimate is close to 2% over the last decade. Employing 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 studies which use labor share of income as a proxy for marginal costs (e.g., Gaĺi et al., 2001, 2003). Model-consistency may therefore be a requirement if the output gap estimate shall represent marginal costs efficiently. JEL-codes: C51, E32, E37, E52.

Key concepts: Economics, New Keynesian economics, Output gap, Phillips curve, Econometrics, Inflation (cosmology), Real interest rate, Proxy (statistics)

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