## Reading the Stars

_IMF Working Papers, July 24, 2020_

## Source details

**Canonical URL:** [Reading the Stars](https://www.imf.org/en/publications/wp/issues/2020/07/24/reading-the-stars-49599)

## Other formats

- [Markdown version](/en/publications/wp/issues/2020/07/24/reading-the-stars-49599/index.md)
- [Structured JSON version](/en/publications/wp/issues/2020/07/24/reading-the-stars-49599/index.json)
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## Bibliographic details
- Authors: Peter D. Williams, Yasser Abdih, Emanuel Kopp
- Published: July 24, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513550916.001

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### Summary and purpose
- Following the global financial crisis, significant uncertainty has existed around the U.S. economy’s steady state equilibrium.
- The paper uses a factor model to provide a new approach to estimating “the stars” (i.e. the neutral interest rate, maximum employment, and the level and growth rate of potential output) that are most consistent with a medium-term equilibrium where inflation converges to the FOMC’s two percent target.
- The approach is applicable to any country with an inflation targeting central bank.
- The model explicitly incorporates estimates of the extensive margin of slack in the labor market, which has proven to be an important factor in describing the post-financial crisis landscape.

### Methodology and key modeling features
- Uses a factor model to estimate latent equilibrium variables (“the stars”).
- Targets a medium-term equilibrium characterization where inflation converges to the FOMC’s two percent target.
- Explicit incorporation of the extensive margin of labor market slack into the estimation framework.

### Major findings and implications
- The factor-model approach yields estimates of:
  - the neutral interest rate,
  - maximum employment,
  - the level and growth rate of potential output,
  that are consistent with inflation converging to the FOMC’s two percent target.
- Including the extensive margin of labor market slack is important for describing post-financial crisis dynamics.

### Applicability and scope
- Applicable to any country with an inflation targeting central bank.
- Focus primarily on the U.S. economy in the context of post-global financial crisis uncertainty.

### Subjects and keywords
- Subject: Business cycles, Inflation, Inflation targeting, Output gap, Productivity
- Keywords: inflation expectation, inflation gap, output gap estimate, output gap estimation certainty, PCE inflation, WP

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2020/07/24/reading-the-stars-49599_