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Potential Output, the Natural Rate of Unemployment, and the Phillips Curve in a Multivariate Structural Time Series Framework

Franz Hahn and Gerhard Ruenstler
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Gerhard Ruenstler: Department of Economics, Institute for Advanced Studies, Vienna

Authors registered in the RePEc Author Service: Gerhard Rünstler ()

No 33, Economics Series from Institute for Advanced Studies

Abstract: We propose a bivariate structural time series framework to decompose GDP and the unemployment rate into their trend, cyclical, and irregular components. We implement Okun's law by a generalised version of the common cycles restriction allowing for a phase shift between the two cycles and add a price-wage block to the system. We estimate by maximum likelihood Phillips curve-type equations, where the particular cycles enter the wage and price equations in levels though the trends are modelled as non-stationary stochastic processes. The extended models provide an improved estimate of the current cyclical position, compared to univariate estimates and the HP filter.

Keywords: Structural Time Series Model; Trends and Cycles; Phillips Curve (search for similar items in EconPapers)
JEL-codes: C22 E30 (search for similar items in EconPapers)
Pages: 16 pages
Date: 1996-06
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