Korobilis, Dimitris (2009): Assessing the transmission of monetary policy shocks using dynamic factor models.
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This paper extends the current literature which questions the stability of the monetary transmission mechanism, by proposing a factor-augmented vector autoregressive (VAR) model with time-varying coefficients and stochastic volatility. The VAR coefficients and error covariances may change gradually in every period or be subject to abrupt breaks. The model is applied to 143 post-World War II quarterly variables fully describing the US economy. I show that both endogenous and exogenous shocks to the US economy resulted in the high inflation volatility during the 1970s and early 1980s. The time-varying factor augmented VAR produces impulse responses of inflation which significantly reduce the price puzzle. Impulse responses of other indicators of the economy show that the most notable changes in the transmission of unanticipated monetary policy shocks occurred for GDP, investment, exchange rates and money.
|Item Type:||MPRA Paper|
|Original Title:||Assessing the transmission of monetary policy shocks using dynamic factor models|
|Keywords:||Structural FAVAR; time varying parameter model; monetary policy|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General
|Depositing User:||Dimitris Korobilis|
|Date Deposited:||29. Nov 2011 12:20|
|Last Modified:||11. Feb 2013 19:07|
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Assessing the transmission of monetary policy using dynamic factor models. (deposited 21. Dec 2010 08:10)
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