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Evolving macroeconomic dynamics in a small open economy: an estimated Markov-switching DSGE model for the United Kingdom

  • Liu, Philip

    ()

    (International Monetary Fund)

  • Mumtaz, Haroon

    ()

    (Bank of England)

This paper carries out a systematic investigation into the possibility of structural shifts in the UK economy using a Markov-switching dynamic stochastic general equilibrium (DSGE) model. We find strong evidence for shifts in the structural parameters of several equations of the DSGE model. In addition, our results indicate that the volatility of structural shocks has also changed over time. However, a version of the model that allows for a change in the coefficients of the Taylor rule and shock volatilities provides the best model fit. Estimates from the selected DSGE model suggest that the mid-1970s were associated with a regime characterised by a smaller reaction by the monetary authorities to inflation developments.

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Paper provided by Bank of England in its series Bank of England working papers with number 397.

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Length: 43 pages
Date of creation: 27 Jul 2010
Date of revision:
Handle: RePEc:boe:boeewp:0397
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  1. Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
  2. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2007. "How Structural Are Structural Parameters?," NBER Working Papers 13166, National Bureau of Economic Research, Inc.
  3. Haroon Mumtaz & Özlem Oomen & Jian Wang, 2006. "Exchange rate pass-through into UK import prices," Bank of England working papers 312, Bank of England.
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