Factor-Augmented Vector Autoregression with narrative identification. An application to monetary policy in the US

Giorgia De Nora

Economics Letters, 2023, vol. 229, issue C

Abstract: We extend the Bayesian Factor-Augmented Vector Autoregressive model (FAVAR) to incorporate an identification scheme based on an external instrument approach. Using this novel modelling framework, we show that a monetary policy tightening in the United States has contractionary effects on the economy. Moreover, accounting for a large information set seems to help mitigate price and real economic puzzles in the estimated impulse responses.

Keywords: Information sufficiency; Factor-augmented VARs; Instrumental variables; Monetary policy; Structural VARs (search for similar items in EconPapers)
JEL-codes: C32 C38 E52 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:229:y:2023:i:c:s0165176523002264

DOI: 10.1016/j.econlet.2023.111201

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