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Current work in progress papers (complete paper will be available soon):
Evolving Macroeconomic dynamics in a small open economy: An estimated Markov Switching DSGE model for the UK (joint with Haroon Mumtaz - BoE), Jan 2010, under review.
This paper investigates the possibility of regime shifts in an open economy DSGE model estimated using data for the UK. We find strong evidence for regime shifts in the structural parameters and shock volatilities of the DSGE model. A version of the model that allows for a switch in the policy rule 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. In addition, both the 1970s and the 1980s were characterised by significantly more volatile shocks. Counterfactual experiments indicate that the policy rule estimated for the mid-1970s contributed to higher and more volatile inflation over that period. Moreover, the response of inflation to monetary policy, cost push and technology shocks was significantly higher during the period characterised by this regime.
DSGE model restrictions for structural VAR identification (joint with Konstantinos Theodoridis - BoE), Nov 2009, under review.
The identification of reduced-form VAR model had been the subject of numerous debates in the literature. Different sets of identifying assumptions can lead to very different conclusions in the policy debate. This paper proposes a theoretical consistent identification strategy using restrictions implied by a DSGE model. Monte Carlo simulations suggest the proposed identification strategy is successful in recovering the true structural shocks from the data. In the face of misspecified model restrictions, the data tend to push the identified VAR responses away from the misspecified model and closer to the true data generating process.
Changes in the Transmission of Monetary Policy: Evidence from a Time-Varying Factor-Augmented VAR (joint with Christiane Baumeister - Ghent University and Haroon Mumtaz - BoE), Oct 2009, under review.
This paper re-examines the evolution in the US monetary transmission mechanism using an empirical framework that incorporates substantially more information than the standard trivariate VAR model used in most previous studies. In particular, we employ an extended version of the factor-augmented VAR proposed in Bernanke et al. (2005) where we introduce time variation in the coefficients and stochastic volatilities in the variances of the shocks. Our formulation has two substantive advantages over earlier work: (i) the additional information summarized by the common factors that are extracted from a large panel of aggregate and disaggregate variables improves the identification of the monetary policy shocks since the factors capture more accurately the amount of information analyzed by the monetary authority, (ii) we are able to estimate the time-varying effects of monetary policy surprises on macroeconomic aggregates and disaggregate prices and quantities of personal consumption expenditures. Our main results indicate that time variation is a dominant feature of key macroeconomic variables and their components. In analyzing the temporal evolution of disaggregate dynamics, we uncover a considerable amount of heterogeneity in sectoral price responses which suggests that monetary policy actions exert an important, and potentially long-lasting, influence on relative prices in the US economy.
International transmission of shocks: A time-varying Factor: Augmented VAR approach to the open economy (joint with Haroon Mumtaz - BoE), Sept 2009, under review.
A growing literature has documented changes to the dynamics of key macroeconomic variables in industrialized countries and highlighted the possibility that these variables may react differently to structural shocks over time. However, existing empirical work on the it international transmission of shocks largely abstracts from the possibility of changes to the international transmission mechanism across time.In addition, the existing empirical literature has largely employed small scale models with limited number of variables. This paper introduces an empirical model which allows the estimation of time-varying response of a large set of domestic variables to foreign money supply, demand and supply shocks. The results show that a foreign monetary policy tightening has substantially different effects on the UK in the period after 1990. In the period before 1990, the shock resembles the classic beggar-thy-neighbor scenario, with decreases in foreign money supply result in an increase in UK real activity. In the later period, the response is negative but largely insignificant. For a foreign demand shock, it has a positive impact on UK GDP between 1980-1990 but its effects have been much smaller in recent periods. Foreign supply shocks have a larger impact on UK inflation during the 1970s relative to the current period.
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