Evolving UK macroeconomic dynamics: a time-varying factor augmented VAR

Haroon Mumtaz

No 386, Bank of England working papers from Bank of England

Abstract: Changes in monetary policy and shifts in dynamics of the macroeconomy are typically described using empirical models that only include a limited amount of information. Examples of such models include time-varying vector autoregressions that are estimated using output growth, inflation and a short-term interest rate. This paper extends these models by incorporating a larger amount of information in these tri-variate VARs. In particular, we use a factor augmented vector autoregression extended to incorporate time-varying coefficients and stochastic volatility in the innovation variances. The reduced-form results not only confirm the finding that the great stability period in the United Kingdom is characterised by low persistence and volatility of inflation and output but also suggest that these findings extend to money growth and asset prices. The impulse response functions display little evidence of a price puzzle indicating that the extra information incorporated in our model leads to more robust structural estimates.

Keywords: FAVAR; great stability; time-varying parameters; stochastic volatility (search for similar items in EconPapers)
JEL-codes: E30 E32 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-03-31
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0386

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