Bayesian Estimation of Dynamic Stochastic General Equilibrium Model Using UK Data

Abstract

This paper applies the Bayesian method to estimate a Dynamic Stochastic General Equilibrium (DSGE) model using quarterly data for the UK over the period from 1971:Q1 through 2009:Q2. The contribution of the paper is two-fold. First, we estimate a model characterised by nominal and real frictions. This estimation allows us to recover the structural parameters of the economy and study the transmission mechanism of a government spending shock. Second, we investigate how the inclusion of fiscal policy rules affect the propagation of shocks and the ability of the model to fit the data. We establish that this inclusion enable the model to fit the data more closely. In addition, it has an impact on the qualitative responses of macroeconomic variables to the government spending shock. Keywords:The transmission mechanism of a government spending shock, Bayesian analysis, (DSGE) model. JEL Classifications: E31, E32, E52, E60.