A time-varying parameter structural model of the UK economy

We estimate a time-varying parameter structural macroeconomic model of the UK econ- omy, using a Bayesian local likelihood methodology. This enables us to estimate a large open-economy DSGE model over a sample that comprises several different monetary pol- icy regimes and an incomplete set of data. Our estimation identifies a gradual shift to a monetary policy regime characterised by an increased responsiveness of policy towards inflation alongside a decrease in the inflation trend down to the two percent target level. The time-varying model also performs remarkably well in forecasting and delivers statis- tically significant accuracy improvements for most variables and horizons for both point and density forecasts compared to the standard fixed-parameter version.