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A long run structural macroeconometric model of the UK

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Abstract

A new modelling strategy is introduced that provides a practical approach to incorporating long-run structural relationships, suggested by economic theory, in an otherwise unrestricted VAR model. The strategy is applied to construct a small quarterly macroeconometric model of the UK, estimated over 1965-1999 in nine variables: domestic and foreign outputs, prices and interest rates, oil prices, the nominal effective exchange rate, and real money balances. The aim is to develop a model with effective exchange rate, and real money balances. The aim is to develop a model with a transparent and theoretically coherent foundation. Tests of restrictions on the long-run relations of the model are presented. The dynamic properties of the model are discussed using impulse responses for the effects of an oil price shock and a monetary policy shock on the long-run relations and the endogenous variables. A decision-based approach is used to identify the monetary policy shock as the movements in interest rates beyond those explained by the implementation of an optimal interest rate rule and by oil price, exchange rate and foreign interest rate innovations.

Suggested Citation

  • Anthony Garratt & Kevin Lee & Mohammad Hashem Pesaran & Yongcheol Shin, 2001. "A long run structural macroeconometric model of the UK," ESE Discussion Papers 35, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:35
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    Keywords

    long-run structural VAR; a core UK model; macroeconomic modelling; monetary policy shock; oil price shock;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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