A time-varying parameter structural model of the UK economy

George Kapetanios; Riccardo M. Masolo; Katerina Petrova; Matthew Waldron

doi:10.1016/j.jedc.2019.05.012

A time-varying parameter structural model of the UK economy

George Kapetanios, Riccardo M. Masolo, Katerina Petrova, Matthew Waldron

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Abstract

We estimate a time-varying parameter structural macroeconomic model of the UK economy, using a Bayesian local likelihood methodology. This enables us to estimate a large open-economy DSGE model over a sample that comprises several different monetary policy regimes and an incomplete set of data. Our estimation identifies a gradual shift to a monetary policy regime characterised by an increased responsiveness of policy towards inflation alongside a decrease in the inflation trend down to the two percent target level. The time-varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons for both point and density forecasts compared to the standard fixed-parameter version.

Original language	English
Article number	103705
Number of pages	26
Journal	Journal of Economic Dynamics and Control
Volume	106
Early online date	28 May 2019
DOIs	https://doi.org/10.1016/j.jedc.2019.05.012
Publication status	Published - Sept 2019

Keywords

DSGE models
Open economy
Time varying parameters
UK economy

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10.1016/j.jedc.2019.05.012

Kapetanios_2019_JEDC_Time-varying_AAM
Copyright Crown Copyright © 2019 Published by Elsevier B.V. All rights reserved. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1016/j.jedc.2019.05.012
Accepted author manuscript, 3.63 MBLicence: CC BY-NC-ND

Cite this

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title = "A time-varying parameter structural model of the UK economy",

abstract = "We estimate a time-varying parameter structural macroeconomic model of the UK economy, using a Bayesian local likelihood methodology. This enables us to estimate a large open-economy DSGE model over a sample that comprises several different monetary policy regimes and an incomplete set of data. Our estimation identifies a gradual shift to a monetary policy regime characterised by an increased responsiveness of policy towards inflation alongside a decrease in the inflation trend down to the two percent target level. The time-varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons for both point and density forecasts compared to the standard fixed-parameter version.",

keywords = "DSGE models, Open economy, Time varying parameters, UK economy",

author = "George Kapetanios and Masolo, {Riccardo M.} and Katerina Petrova and Matthew Waldron",

note = "Katerina Petrova acknowledges support by the Alan Turing Institute under the EPSRC grant EP/N510129/1.",

year = "2019",

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language = "English",

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AU - Kapetanios, George

AU - Masolo, Riccardo M.

AU - Petrova, Katerina

AU - Waldron, Matthew

N1 - Katerina Petrova acknowledges support by the Alan Turing Institute under the EPSRC grant EP/N510129/1.

PY - 2019/9

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N2 - We estimate a time-varying parameter structural macroeconomic model of the UK economy, using a Bayesian local likelihood methodology. This enables us to estimate a large open-economy DSGE model over a sample that comprises several different monetary policy regimes and an incomplete set of data. Our estimation identifies a gradual shift to a monetary policy regime characterised by an increased responsiveness of policy towards inflation alongside a decrease in the inflation trend down to the two percent target level. The time-varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons for both point and density forecasts compared to the standard fixed-parameter version.

AB - We estimate a time-varying parameter structural macroeconomic model of the UK economy, using a Bayesian local likelihood methodology. This enables us to estimate a large open-economy DSGE model over a sample that comprises several different monetary policy regimes and an incomplete set of data. Our estimation identifies a gradual shift to a monetary policy regime characterised by an increased responsiveness of policy towards inflation alongside a decrease in the inflation trend down to the two percent target level. The time-varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons for both point and density forecasts compared to the standard fixed-parameter version.

KW - DSGE models

KW - Open economy

KW - Time varying parameters

KW - UK economy

U2 - 10.1016/j.jedc.2019.05.012

DO - 10.1016/j.jedc.2019.05.012

M3 - Article

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VL - 106

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

M1 - 103705

ER -

A time-varying parameter structural model of the UK economy

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Keywords

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