A small New Keynesian state space model of the Australian economy

Shawn Chen Yu Leu, Jeffrey Sheen*

*Corresponding author for this work

Research output: Contribution to journalArticle

8 Citations (Scopus)


Using a small New Keynesian state space macroeconomic model, we apply maximum likelihood estimation and the Kalman filter to obtain joint estimates of the unobservable medium-run paths of potential output and its normal rate of growth, the NAIRU, the neutral real interest rate and the subjective discount factor for Australia from 1984Q1 to 2006Q4. Using the estimated model we obtain dynamic forecasts for output, unemployment, and inflation to compare with the actual data from 2007Q1 to 2008Q4. Combining the estimated model with a monetary policy rule, we examine impulse responses of inflation and the output and unemployment gaps to shocks associated with the global financial crisis of 2008.

Original languageEnglish
Pages (from-to)672-684
Number of pages13
JournalEconomic Modelling
Issue number1-2
Publication statusPublished - Jan 2011


  • natural rates
  • New Keynesian
  • Kalman filter
  • state space model
  • unobserved components

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