Minding The Gap: Central Bank Estimates of the Unemployment Natural Rate  

By Sharon Kozicki and P.A. Tinsley
September 2005 
RWP 05-03
Research Division 
Federal Reserve Bank of Kansas City 

Abstract

      A time-varying parameter framework is suggested for use with real-time multiperiod forecast data to estimate implied forecast equations. The framework is applied to historical briefing forecasts prepared for the Federal Open Market Committee to estimate the U.S. central bank’s ex ante perceptions of the natural rate of unemployment. Relative to retrospective estimates, empirical results do not indicate severe underestimation of the natural rate of unemployment in the 1970s.

Keywords: FOMC Greenbook forecasts; the Great Inflation; time-varying natural rates.

JEL classification: E3, E5, N1

*Authors’ addresses are Vice President and Economist, Research Department, Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City, MO, 64198, USA, sharon.kozicki@kc.frb.org; and Visitor, Department of Economics, George Washington University, 3840 Beecher St., NW, Washington, DC 20007, USA, ptinsley@gwu.edu. We are grateful to Normand Bernard and staff of the FOMC Secretariat for access to historical FOMC documents, and to Hans Amman, Editor-in-Chief, for comments. Views expressed are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

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