Joint Estimation of the Natural Rate of Interest, the Natural Rate of Unemployment, Expected Inflation, and Potential Output

45 Pages Posted: 22 Aug 2007

See all articles by Luca Benati

Luca Benati

European Central Bank (ECB)

Giovanni Vitale

European Central Bank (ECB)

Date Written: August 2007

Abstract

We jointly estimate the natural rate of interest, the natural rate of unemployment, expected inflation, and potential output for the Euro area, the United States, Sweden, Australia, and the United Kingdom. Particular attention is paid to time-variation in (i) the data-generation process for inflation, which we capture via a time-varying parameters specification for the Phillips curve portion of the model; and (ii) the volatilities of disturbances to inflation and cyclical(log) output, which we capture via break tests. Time-variation in the natural rate of interest is estimated to have been comparatively large for the United States, and especially for the Euro area, and smaller for Australia and the United Kingdom. Overall, natural rate estimates are characterised by a significant extent of uncertainty.

Keywords: Monetary policy, natural rate of interest, time-varying parameters, Monte Carlo integration, median-unbiased estimation, endogenous break tests, bootstrapping

JEL Classification: E31, E32, E52

Suggested Citation

Benati, Luca and Vitale, Giovanni, Joint Estimation of the Natural Rate of Interest, the Natural Rate of Unemployment, Expected Inflation, and Potential Output (August 2007). ECB Working Paper No. 797. Available at SSRN: https://ssrn.com/abstract=1003972

Luca Benati (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giovanni Vitale

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6000 (Fax)

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