A Small state-space model of the Australian economy

Using a small 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 natural rate of unemployment and the natural real interest rate. Our unobserved component analysis indicates that in 2005, the Australian economy was close to potential output, the normal rate of growth was low, unemployment was below the natural rate presaging inflationary pressures, and that the real rate of interest was significantly below its natural rate, suggesting that monetary policy was too expansionary.23 page(s