Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models

Dimitris Korompilis ()
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Dimitris Korompilis: Department of Economics, University of Strathclyde
Authors registered in the RePEc Author Service: Dimitris Korobilis

No 914, Working Papers from University of Strathclyde Business School, Department of Economics

Abstract: The evolution of monetary policy in the U.S. is examined based on structural dynamic factor models. I extend the current literature which questions the stability of the monetary transmission mechanism, by proposing and studying time-varying parameters factor-augmented vector autoregressions (TVP-FAVAR), which allow for fast and efficient inference based on hundreds of explanatory variables. Different specifcations are compared where the factor loadings, VAR coefficients and error covariances, or combinations of those, may change gradually in every period or be subject to small breaks. The model is applied to 157 post-World War II U.S. quarterly macroeconomic variables. The results clearly suggest that the propagation of the monetary and non-monetary (exogenous) shocks has altered its behavior, and speciffically in a fashion which supports smooth evolution rather than abrupt change. The most notable changes were in the responses of real activity measures, prices and monetary aggregates, while other key indicators of the economy remained relatively unaffected.

Keywords: Structural FAVAR; time varying parameter model; monetary policy (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2009-05
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models-super- (2013)
Working Paper: Assessing the transmission of monetary policy using dynamic factor models (2010)
Working Paper: Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:str:wpaper:0914

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