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

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  • Chen, Xiaoshan
  • MacDonald, Ronald

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://repo.sire.ac.uk/handle/10943/262
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Bibliographic Info

Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2011-21.

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Date of creation: 2011
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Handle: RePEc:edn:sirdps:262

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Keywords: Markov-switching; Bayesian analysis; DSGE models;

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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. Xiaoshan Chen & Tatiana Kirsanova & Campbell Leith, 2013. "How Optimal is US Monetary Policy?," Working Papers 2013_08, Business School - Economics, University of Glasgow.
  3. Marian Vavra, 2013. "Testing for linear and Markov switching DSGE models," Working and Discussion Papers WP 3/2013, Research Department, National Bank of Slovakia.
  4. 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.
  5. 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.

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