A Time Varying Parameter Structural Model of the UK Economy

33 Pages Posted: 13 Sep 2017

See all articles by Katerina Petrova

Katerina Petrova

University of St Andrews

George Kapetanios

Bank of England

Riccardo Masolo

Bank of England

Matthew Waldron

Bank of England

Date Written: September 08, 2017

Abstract

We 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.

Keywords: DSGE models, Bayesian methods, local likelihood, time varying parameters, forecasting

JEL Classification: C11, C53, E27

Suggested Citation

Petrova, Katerina and Kapetanios, George and Masolo, Riccardo and Waldron, Matthew, A Time Varying Parameter Structural Model of the UK Economy (September 08, 2017). Bank of England Working Paper No. 677, Available at SSRN: https://ssrn.com/abstract=3035227 or http://dx.doi.org/10.2139/ssrn.3035227

Katerina Petrova

University of St Andrews ( email )

The Gateway
North Haugh
St Andrews, Fife KY16 9RJ
United Kingdom

George Kapetanios

Bank of England ( email )

Riccardo Masolo (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Matthew Waldron

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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