Empirical Economics

, Volume 40, Issue 2, pp 521–536 | Cite as

Estimating Europe’s natural rates

Original Paper

Abstract

This article estimates potential output, the natural rate of unemployment, 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. The model further accounts for new developments in unobserved component models by allowing (i) for correlation between shocks to the natural rates and the corresponding gaps and (ii) structural breaks in the drift of potential output and the natural rate of unemployment.

Keywords

Natural rates Correlated unobserved components Kalman filter Structural breaks 

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Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.University of Muenster and SHERPPAMuensterGermany

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