Rafael Domenech and
Victor Gomez
This paper proposes a new method to obtain estimates of the
NAIRU, the core inflation and the investment rate trend for the United States using an
unobserved components model which is compatible with the usual decomposition of real gross
domestic product into trend and cycle. The model includes a standard Okun's law, a
forward-looking Phillips curve and an investment equation. The unknown parameters in the
model are estimated by maximum likelihood using a Kalman filter initialized with a
partially diffuse prior, and the unobserved components are estimated using a smoothing
algorithm. Our results show that the output gap is positively correlated with the
deviations of the investment rate from its trend and the inflation rate from core
inflation, and negatively correlated with the deviations of the unemployment rate from the
NAIRU.
Paper (pdf) Data and Matlab
codes (zip)
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