A time-varying parameter structural model of the UK economy

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

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    1 Citation (Scopus)

    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 languageEnglish
    Article number103705
    Number of pages26
    JournalJournal of Economic Dynamics and Control
    Volume106
    Early online date28 May 2019
    DOIs
    Publication statusPublished - Sept 2019

    Keywords

    • DSGE models
    • Open economy
    • Time varying parameters
    • UK economy

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