It has been suggested that interest-rate smoothing may be partly explained by an omitted variable that relates to conditions in financial markets. We propose an alternative interpretation that suggests that it relates to measurement errors in the output gap.

An approach to decomposing and interpreting the inflation process is proposed. It suggests that the low U.S. inflation rate in recent years reflects a structural development, but that the low levels of unemployment may be a mainly cyclical phenomenon.

A new approach is proposed for estimating potential output and the NAIRU. Identification is achieved using Okun's law and a Phillips curve. The performance of the methodology is exemplified using data from Canada, the UK, and the US.