No 41. System Estimates of Potential Output and the NAIRU

by Mikael Apel , Per Jansson*
Economics Department, Sveriges Riksbank, S-103 37 Stockholm, Sweden
September 1997

Abstract

This paper proposes a new approach for estimating potential output and the NAIRU. The methodology models these key unobservable economic variables as latent stochastic trends within a trivariate system of observables comprising information on unemployment, GDP, and inflation. Identification is achieved through the use of a standard version of Okun’s law and a Phillips curve. The performance of the procedure is investigated using Swedish quarterly data covering the time period 1970:1-1996:3.

Keywords

Kalman filter; NAIRU; Okun’s law; Phillips curve; Potential output; Structural time-series models; Unobserved components models.

JEL classification

C32, E32.