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Using estimated models to assess nominal and real rigidities in the United Kingdom

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  • Kamber, Gunes

    ()
    (Reserve Bank of New Zealand)

  • Millard, Stephen

    ()
    (Bank of England)

Abstract

This paper aims to contribute to our understanding of inflation dynamics in the United Kingdom by estimating two dynamic stochastic general equilibrium models and assessing the role of nominal and real rigidities within them. We first obtain an empirical representation of the monetary transmission mechanism in the United Kingdom and then estimate the models by minimising the difference between this representation and its model equivalents. We find that both models can explain the data reasonably well without relying on undue amounts of price and wage stickiness.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 396.

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Length: 47 pages
Date of creation: 27 Jul 2010
Date of revision:
Handle: RePEc:boe:boeewp:0396

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Keywords: Minimum distance estimation; DSGE models; Nominal and real rigidities;

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  1. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
  2. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers.
  3. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  4. Yashiv, Eran, 2006. "Evaluating the Performance of the Search and Matching Model," IZA Discussion Papers 1931, Institute for the Study of Labor (IZA).
  5. Del Negro, Marco & Schorfheide, Frank, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1191-1208, October.
  6. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2009. "Minimum Distance Estimation and Testing of DSGE Models from Structural VARs," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(6), pages 883-894, December.
  7. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
  8. Jennifer V. Greenslade & Miles Parker, 2012. "New Insights into Price‐Setting Behaviour in the UK: Introduction and Survey Results," Economic Journal, Royal Economic Society, vol. 122(558), pages F1-F15, 02.
  9. Burda, Michael C & Wyplosz, Charles, 1993. "Gross Worker and Job Flows in Europe," CEPR Discussion Papers 868, C.E.P.R. Discussion Papers.
  10. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  11. Charlotta Groth & Jarkko Jääskelä & Paolo Surico, 2006. "Fundamental inflation uncertainty," Bank of England working papers 309, Bank of England.
  12. Macallan, Clare & Millard, Stephen & Parker, Miles, 2008. "The cyclicality of mark-ups and profit margins for the United Kingdom: some new evidence," Bank of England working papers 351, Bank of England.
  13. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Working Papers 2007-006, Federal Reserve Bank of St. Louis.
  14. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  15. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers 380, Bank of England.
  16. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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Cited by:
  1. Julien Albertini & Güneş Kamber & Michael Kirker, 2011. "An estimated small open economy model with frictional unemployment," Reserve Bank of New Zealand Discussion Paper Series DP2011/04, Reserve Bank of New Zealand.
  2. Dixon, H. & Le Bihan, H., 2011. "Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications," Working papers 324, Banque de France.
  3. Millard, Stephen, 2011. "An estimated DSGE model of energy, costs and inflation in the United Kingdom," Bank of England working papers 432, Bank of England.

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