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

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  • Mumtaz, Haroon

    ()
    (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.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 386.

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Length: 34 pages
Date of creation: 31 Mar 2010
Date of revision:
Handle: RePEc:boe:boeewp:0386

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Keywords: FAVAR; great stability; time-varying parameters; stochastic volatility;

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  1. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 2002. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 69-87, January.
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  4. Timothy Cogley & Thomas Sargent, . "Evolving Post-World War II U.S. Inflation Dynamics," Working Papers 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University.
  5. Efrem Castelnuovo & Paolo Surico, 2006. "The Price Puzzle: Fact or Artifact?," "Marco Fanno" Working Papers 0016, Dipartimento di Scienze Economiche "Marco Fanno".
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  9. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," NBER Working Papers 10220, National Bureau of Economic Research, Inc.
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  12. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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  14. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
  15. D R Osborn & M Sensier, 2004. "Modelling UK Inflation: Persistence, Seasonality and Monetary Policy," Centre for Growth and Business Cycle Research Discussion Paper Series 46, Economics, The Univeristy of Manchester.
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