An Estimated DSGE Model for the United Kingdom

By DiCecio, Riccardo; Nelson, Edward | Federal Reserve Bank of St. Louis Review, July-August 2007 | Go to article overview
Save to active project

An Estimated DSGE Model for the United Kingdom

DiCecio, Riccardo, Nelson, Edward, Federal Reserve Bank of St. Louis Review

The authors estimate the dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005) on U.K. data. Their estimates suggest that price stickiness is a more important source of nominal rigidity in the United Kingdom than wage stickiness. Their estimates of parameters governing investment behavior are only well behaved when post-1979 observations are included, which reflects government policies until the late 1970s that obstructed the influence of market forces on investment. (JEL E31, E32, E52)


In this paper we estimate a dynamic stochastic general equilibrium (DSGE) model with nominal rigidities for the U.K. economy. The model we estimate is due to Christiano, Eichenbaum, and Evans (2005; CEE) and has become a benchmark, matching important aspects of the U.S. data while also being derived from optimizing behavior.

Interest in DSGE modeling of the United Kingdom has been heightened in recent years with the introduction of the Bank of England quarterly model (BEQM) into the U.K. monetary policy process. This model is based to a considerable degree on explicit optimizing foundations; see Harrison et al. (2005) for the model and Pagan (2005) for a discussion. BEQM is, however, dissimilar in important respects from the CEE model of the United States and the variant of the CEE model that Smets and Wouters (2003) estimate for the euro area. These dissimilarities make it difficult to use BEQM to compare the structure of the U.K. economy with that of other economies. For example, the estimation procedure for BEQM is different from that used by CEE and by Smets and Wouters; portions of the BEQM model are estimated over a considerably shorter sample than CEE consider for the United States, and there are deviations from explicit optimization in the dynamics of the BEQM model.

All in all, it is probably fair to say that there has been considerably less work done for the United Kingdom in terms of DSGE modeling with systems estimation than there has been for other economies. But U.K. data may contain a type of information that is ideal for estimation of a DSGE model--specifically, information on private sector responses to policy actions. As the present governor of the Bank of England, Mervyn King, observed some 30 years ago,

   Maintenance of the existing order and existing rates produces no
   information, whereas more information can be obtained by making
   changes. In this respect the U.S.... is at a disadvantage by
   comparison with the U.K. A good illustration of this is afforded by
   the excitement generated amongst American economists in the 1960s
   by the investment tax credit and the attempts to assess its
   effects. A British economist would have shrugged this off as a
   mere trifle compared to the changes he had witnessed over the
   years. (King, 1977, p. 6)

This observation, though made with reference to the changes wrought in U.K. fiscal policy up to the 1960s, applies tenfold to monetary policy experience in the period since the 1960s. Over that period, the United Kingdom has undergone great variation in inflation, interest rates, and monetary regimes. (1) It is true that for estimation this is a mixed blessing because large regime changes make it problematic to estimate a structural model over a long sample. But Christiano, Eichenbaum, and Evans (1999) and Sims and Zha (2006) argue for the United States that constant-parameter policy reaction functions may be reasonable approximations even over long samples, a view also implicit in CEE's (2005) choice of a 1965-95 estimation period. In modeling the United Kingdom using a DSGE model, we make a compromise between these positions by treating the period since 1979 as a single regime, (2) but also by presenting results for pre-1979 and a long sample covering 1962-2005. (3)

We present in the following sections our model, estimates for our main sample, and results for the longer sample, with a discussion of other regime-change issues.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

An Estimated DSGE Model for the United Kingdom


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?