Evolving UK Macroeconomic Dynamics: A Time-Varying Factor Augmented VAR

34 Pages Posted: 5 Apr 2010

See all articles by Haroon Mumtaz

Haroon Mumtaz

University of London - School of Sciences

Date Written: March 31, 2010

Abstract

Changes in monetary policy and shifts in dynamics of the macroeconomy are typically described using empirical models that only include a limited amount of information. Examples of such models include time-varying vector autoregressions that are estimated using output growth, inflation and a short-term interest rate. This paper extends these models by incorporating a larger amount of information in these tri-variate VARs. In particular, we use a factor augmented vector autoregression extended to incorporate time-varying coefficients and stochastic volatility in the innovation variances. The reduced-form results not only confirm the finding that the great stability period in the United Kingdom is characterised by low persistence and volatility of inflation and output but also suggest that these findings extend to money growth and asset prices. The impulse response functions display little evidence of a price puzzle indicating that the extra information incorporated in our model leads to more robust structural estimates.

Keywords: FAVAR, great stability, time-varying parameters, stochastic volatility

JEL Classification: E30, E32

Suggested Citation

Mumtaz, Haroon, Evolving UK Macroeconomic Dynamics: A Time-Varying Factor Augmented VAR (March 31, 2010). Bank of England Working Paper No. 386. Available at SSRN: https://ssrn.com/abstract=1582364 or http://dx.doi.org/10.2139/ssrn.1582364

Haroon Mumtaz (Contact Author)

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

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