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Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change

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  • Kapetanios, George

    ()
    (Queen Mary and Westfield College and Bank of England)

  • Yates, Tony

    ()
    (Bank of England)

Abstract

Using a model of deterministic structural change, we revisit several topics in inflation dynamics explored previously using stochastic, time-varying parameter models. We document significant reductions in inflation persistence and predictability. We estimate that changes in the volatility of shocks were decisive in accounting for the great moderations of the United States and the United Kingdom. We also show that the magnitude and the persistence of the response of inflation and output to monetary policy shocks has fallen in these two countries. These findings should be of interest in those seeking to resolve theoretical debates about the sources of apparent nominal and real frictions in the macroeconomy, and the causes of the Great Moderation.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 434.

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Length: 63 pages
Date of creation: 28 Jul 2011
Date of revision:
Handle: RePEc:boe:boeewp:0434

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  1. Luca Benati, 2008. "The "Great Moderation" in the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(1), pages 121-147, 02.
  2. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, Biometrika Trust, vol. 89(2), pages 484-489, June.
  3. Luca Benati, 2006. "UK monetary regimes and macroeconomic stylised facts," Bank of England working papers 290, Bank of England.
  4. Jesús Fernández-Villaverde & Juan F Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," Levine's Bibliography 843644000000000057, UCLA Department of Economics.
  5. Kapetanios, G. & Tzavalis, E., 2010. "Modeling structural breaks in economic relationships using large shocks," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(3), pages 417-436, March.
  6. O'Reilly,Gerard & Whelan, Karl, 2004. "Has Euro-Area Inflation Persistence Changed Over Time?," Research Technical Papers 4/RT/04, Central Bank of Ireland.
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  8. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  9. Fan, Yanqin, 1998. "Goodness-Of-Fit Tests Based On Kernel Density Estimators With Fixed Smoothing Parameters," Econometric Theory, Cambridge University Press, vol. 14(05), pages 604-621, October.
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  11. Rodríguez Poo, Juan M. & Ferreira García, María Eva & Orbe Mandaluniz, Susan, 2001. "Nonparametric estimation of time varying parameters under shape restrictions," BILTOKI, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) 2001-02, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
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