Solving the Price Puzzle Via A Functional Coefficient Factor-Augmented VAR Model

Zongwu Cai and Xiyuan Liu
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Zongwu Cai: Department of Economics, The University of Kansas, Lawrence, KS 66045, USA
Xiyuan Liu: Department of Economics, The University of Kansas, Lawrence, KS 66045, USA

No 202106, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: Effects of monetary policy shocks on large amounts of macroeconomic variables are identified by a new class of functional-coefficient factor-augmented vector autoregressive (FAVAR) models, which allows coefficients of classical FAVAR models to vary with some variable. In the empirical study, we analyze the impulse response functions estimated by the newly proposed model and compare our results with those from classical FAVAR models. Our empirical finding is that our new model has an ability to eliminate the well-known price puzzle without adding new variables into the dataset.

Keywords: Factor-augmented vector autoregressive; Functional coefficient models; Impulse response functions; Nonparametric estimation; Price puzzle (search for similar items in EconPapers)
JEL-codes: C14 C32 E30 E31 (search for similar items in EconPapers)
Date: 2021-01, Revised 2021-01
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-mon
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