Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153203
Authors: 
Benati, Luca
Year of Publication: 
2007
Series/Report no.: 
ECB Working Paper 769
Abstract: 
We use a Bayesian time-varying parameters structural VAR with stochastic volatility for GDP deflator inflation, real GDP growth, a 3-month nominal rate, and the rate of growth of M4 to investigate the underlying causes of the Great Moderation in the United Kingdom. Our evidence points towards a dominant role played by shocks in fostering the more stable macroeconomic environment of the last two decades. Results from counterfactual simulations, in particular, show that (1) the Great Inflation was due, to a dominant extent, to large demand non-policy shocks, and to a lesser extent–especially in 1973 and 1979–to supply shocks; (2) imposing the 1970s’ monetary rule over the entire sample period would have made almost no difference in terms of inflation and output growth outcomes; and (3)mechanically ‘bringing the Monetary Policy Committee vback in time’ would only have had a limited impact on the Great Inflation episode, at the cost of lower output growth. These results are quite striking in the light of the more traditional, narrative approach, which suggests that the monetary policy regime is an important factor in explaining the Great Moderation in the United Kingdom. We discuss one interpretation which could explain both sets of results, based on the ‘indeterminacy hypothesis’ advocated, for the United States, by Clarida, Gali, and Gertler (2000) and Lubik and Schorfheide (2004).
Subjects: 
Bayesian VARs
European Monetary System
frequency domain
Great Inflation
identified VARs
Lucas Critique
policy counterfactuals
stochastic volatility
timevarying parameters
JEL: 
E32
E47
E52
E58
Document Type: 
Working Paper

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