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Realized and Optimal Monetary Policy Rules in an Estimated Markov‐Switching DSGE Model of the United Kingdom

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  • XIAOSHAN CHEN
  • RONALD MACDONALD

Abstract

This paper investigates underlying changes in the UK economy over the past thirtyfive years using a small open economy DSGE model. Using Bayesian analysis, we find UK monetary policy, nominal price rigidity and exogenous shocks, are all subject to regime shifting. A model incorporating these changes is used to estimate the realised monetary policy and derive the optimal monetary policy for the UK. This allows us to assess the effectiveness of the realised policy in terms of stabilising economic fluctuations, and, in turn, provide an indication of whether there is room for monetary authorities to further improve their policies.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00524.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 6 (09)
Pages: 1091-1116

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:6:p:1091-1116

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Afonso, António & Toffano, Priscilla, 2013. "Fiscal regimes in the EU," Working Paper Series 1529, European Central Bank.
  2. Kirsanova, Tatiana & Leith, Campbell & Chen, Xiaoshan, 2013. "How Optimal is US Monetary Policy?," SIRE Discussion Papers 2013-53, Scottish Institute for Research in Economics (SIRE).
  3. Boris Blagov, 2013. "Financial crises and time- varying risk premia in a small open economy: a Markov-Switching DSGE model for Estonia," Bank of Estonia Working Papers wp2013-8, Bank of Estonia, revised 09 Dec 2013.
  4. Caglayan, Mustafa & Jehan, Zainab & Mouratidis, Kostas, 2012. "Asymmetric monetary policy rules for open economies: Evidence from four countries," MPRA Paper 37401, University Library of Munich, Germany.
  5. Marian Vavra, 2013. "Testing for linear and Markov switching DSGE models," Working and Discussion Papers WP 3/2013, Research Department, National Bank of Slovakia.

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