Norges Bank

Working Paper

Estimating the natural rates in a simple New Keynesian framework

Author:
Hilde C. Bjørnland, Kai Leitemo and Junior Maih
Series:
Working Paper
Number:
10/2007

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. 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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ISSN 1502-8190 (online)

Published 21 December 2007 14:15
Published 21 December 2007 14:15