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A time-varying parameter structural model of the UK economy

George Kapetanios, Riccardo M. Masolo, Katerina Petrova and Matt Waldron ()

Journal of Economic Dynamics and Control, 2019, vol. 106, issue C, -

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 (search for similar items in EconPapers)
JEL-codes: C11 C53 E27 E52 (search for similar items in EconPapers)
Date: 2019
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