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An estimated DSGE model of energy, costs and inflation in the United Kingdom

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  • Millard, Stephen

    ()
    (Bank of England)

Abstract

In this paper, I estimate a dynamic stochastic general equilibrium (DSGE) model of the United Kingdom. The basic building blocks of the model are standard in the literature. The main complication is that there are three consumption goods: non-energy output, petrol and utilities; given relative prices and their overall wealth, consumers choose how much of each of these goods to consume in order to maximise their utility. Each of the consumption goods is produced according to a sector-specific production function and sticky prices in each sector imply sector-specific New Keynesian Phillips Curves. I show how this model, once estimated, could form a useful additional input within a policymaker’s ‘suite of models’ by considering its implications for the responses of various macroeconomic variables to different economic shocks and by decomposing recent movements of energy and non-energy output and inflation into the proportions caused by each of the shocks.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 432.

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Length: 41 pages
Date of creation: 26 Jul 2011
Date of revision:
Handle: RePEc:boe:boeewp:0432

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Keywords: Dynamic stochastic general equilibrium model; Energy prices and inflation;

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References

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  1. Rajeev Dhawan & Karsten Jeske, 2006. "Energy price shocks and the macroeconomy: the role of consumer durables," Working Paper 2006-09, Federal Reserve Bank of Atlanta.
  2. Olivier J. Blanchard & Jordi Galí, 2007. "The macroeconomic effects of oil price shocks: Why are the 2000s so different from the 1970s?," Economics Working Papers 1045, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008.
  3. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  4. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Working Papers 2007-006, Federal Reserve Bank of St. Louis.
  5. Blanchard, Olivier J & Galí, Jordi, 2008. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?," CEPR Discussion Papers 6631, C.E.P.R. Discussion Papers.
  6. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers 380, Bank of England.
  7. Kamber, Gunes & Millard, Stephen, 2010. "Using estimated models to assess nominal and real rigidities in the United Kingdom," Bank of England working papers 396, Bank of England.
  8. Julio J. Rotemberg & Michael Woodford, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," NBER Working Papers 5634, National Bureau of Economic Research, Inc.
  9. In-Moo Kim & Prakash Loungani, 1991. "The role of energy in real business cycle models," Working Paper Series, Macroeconomic Issues 91-6, Federal Reserve Bank of Chicago.
  10. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
  11. Hoover, Kevin D. & Perez, Stephen J., 1994. "Post hoc ergo propter once more an evaluation of 'does monetary policy matter?' in the spirit of James Tobin," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 47-74, August.
  12. Harrison, Richard & Thomas, Ryland & de Weymarn, Iain, 2011. "The impact of permanent energy price shocks on the UK economy," Bank of England working papers 433, Bank of England.
  13. Greenslade, Jennifer & Parker, Miles, 2010. "New insights into price-setting behaviour in the United Kingdom," Bank of England working papers 395, Bank of England.
  14. Capie,Forrest, 2010. "The Bank of England," Cambridge Books, Cambridge University Press, number 9780521192828, April.
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Cited by:
  1. Dixon, Huw & Franklin, Jeremy & Millard, Stephen, 2014. "Sectoral shocks and monetary policy in the United Kingdom," Bank of England working papers 499, Bank of England.
  2. Burgess, Stephen & Fernandez-Corugedo, Emilio & Groth, Charlotta & Harrison, Richard & Monti, Francesca & Theodoridis, Konstantinos & Waldron, Matt, 2013. "The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models," Bank of England working papers 471, Bank of England.
  3. Harrison, Richard & Thomas, Ryland & de Weymarn, Iain, 2011. "The impact of permanent energy price shocks on the UK economy," Bank of England working papers 433, Bank of England.

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