Forecasting UK GDP Growth, Inflation and Interest Rates under Structural Change: A Comparison of Models with Time-Varying Parameters

56 Pages Posted: 21 May 2012

See all articles by Alina Barnett

Alina Barnett

Bank of England

Haroon Mumtaz

University of London - School of Sciences

Konstantinos Theodoridis

Cardiff University

Date Written: May 2012

Abstract

Evidence from a large and growing empirical literature strongly suggests that there have been changes in inflation and output dynamics in the United Kingdom. This is largely based on a class of econometric models that allow for time-variation in coefficients and volatilities of shocks. While these have been used extensively to study evolving dynamics and for structural analysis, there is little evidence on their usefulness in forecasting UK output growth, inflation and the short-term interest rate. This paper attempts to fill this gap by comparing the performance of a wide variety of time-varying parameter models in forecasting output growth, inflation and a short rate. We find that allowing for time-varying parameters can lead to large and statistically significant gains in forecast accuracy.

Keywords: Time-varying parameters, stochastic volatility, VAR, FAVAR, forecasting, Bayesian estimation

JEL Classification: C32, E37, E47

Suggested Citation

Barnett, Alina and Mumtaz, Haroon and Theodoridis, Konstantinos, Forecasting UK GDP Growth, Inflation and Interest Rates under Structural Change: A Comparison of Models with Time-Varying Parameters (May 2012). Bank of England Working Paper No. 450. Available at SSRN: https://ssrn.com/abstract=2063198 or http://dx.doi.org/10.2139/ssrn.2063198

Alina Barnett (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Haroon Mumtaz

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Konstantinos Theodoridis

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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