A time-varying parameter structural model of the UK economy

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