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A time varying parameter structural model of the UK economy

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  • Petrova, Katerina

    (University of St Andrews)

  • Kapetanios, George

    (School of Management and Business, Kings College, London)

  • Masolo, Riccardo

    (Bank of England)

  • Waldron, Matthew

    (Bank of England)

Abstract

e estimate a time varying parameter structural macroeconomic model of the UK economy, using a Bayesian local likelihood methodology. This enables us to estimate a large open-economy DSGE model over a sample that comprises several different regimes and an incomplete set of data. Our estimation identifies a gradual shift to a monetary policy regime characterised by a marked increase in the responsiveness of monetary policy to inflation alongside a decrease in the level of trend inflation down to the 2% target level. The time varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons in both point and density forecast performance compared to the standard fixed parameter version.

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  • Petrova, Katerina & Kapetanios, George & Masolo, Riccardo & Waldron, Matthew, 2017. "A time varying parameter structural model of the UK economy," Bank of England working papers 677, Bank of England.
    • Handle: RePEc:boe:boeewp:0677
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    More about this item

    Keywords

    DSGE models; Bayesian methods; local likelihood; time varying parameters; forecasting;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

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