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Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK
Author(s) -
LIU PHILIP,
MUMTAZ HAROON
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00431.x
Subject(s) - dynamic stochastic general equilibrium , economics , counterfactual thinking , volatility (finance) , small open economy , econometrics , markov chain , great moderation , structural change , sample (material) , stochastic volatility , macroeconomics , monetary policy , mathematics , statistics , philosophy , chemistry , epistemology , chromatography
This paper investigates the possibility of shifts in the UK economy using a Markov switching open economy dynamic stochastic general equilibrium (DSGE) model. We find overwhelming evidence to reject the hypothesis that the deep structural parameters of the underlying structural model had stayed constant throughout the sample period and there is significant changes to the volatility of the structural shocks. Counterfactual experiments based on the model with the best empirical fit indicate that the change in the policy rule as well as changes to the volatility of the structural shocks over the sample period are crucial features in explaining UK’s macroeconomic performance.