Decompositions, forecasts and scenarios from an estimated DSGE model for the UK economy

By Daniel Albuquerque, Jenny Chan, Derrick Kanngiesser, David Latto, Simon Lloyd, Sumer Singh and Jan Žáček

We describe a medium-scale, open-economy dynamic stochastic general equilibrium model of the UK economy, which has its foundations in ‘COMPASS’, the Bank of England’s ‘Central Organising Model for Projection Analysis and Scenario Simulation’ described in Burgess et al (2013). The model we describe is augmented to include imported energy goods in production and consumption, time-varying trends, an expanded set of economic shocks and real adjustment costs. We parametrise the model via a mix of calibration and full-information Bayesian estimation. The model can match key moments in the UK data and aligns well with salient empirical impulse response functions. The model is part of a broader suite used to inform the monetary policy process at the Bank of England, and it can be used in a range of ways. In this paper, we explain how the model can be applied to produce structural decompositions, forecasts and counterfactual scenarios.

Decompositions, forecasts and scenarios from an estimated DSGE model for the UK economy