Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov-Switching DSGE Model for the United Kingdom

43 Pages Posted: 27 Jul 2010

See all articles by Philip Liu

Philip Liu

International Monetary Fund (IMF)

Haroon Mumtaz

University of London - School of Sciences

Date Written: July 27, 2010

Abstract

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.

Keywords: Markov Switching, DSGE, Bayesian Estimation

JEL Classification: E23, E32

Suggested Citation

Liu, Philip and Mumtaz, Haroon, Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov-Switching DSGE Model for the United Kingdom (July 27, 2010). Bank of England Working Paper No. 397. Available at SSRN: https://ssrn.com/abstract=1649449 or http://dx.doi.org/10.2139/ssrn.1649449

Philip Liu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Haroon Mumtaz (Contact Author)

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

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