The evolution of monetary policy effectiveness under macroeconomic instability

German Lopez-Buenache

Economic Modelling, 2019, vol. 83, issue C, 221-233

Abstract: This paper studies the evolution of the monetary policy transmission mechanisms in the US following the Great Recession. The implementation of a modified Dynamic Factor Model enables the identification of two different structural scenarios based on the information contained in a large dataset of 110 variables. Impulse Response Functions to an increase of official interest rate for this large dataset are estimated for each structural context. Three techniques are combined to deal with the dimensionality problems which emerge from an estimation procedure of this magnitude: (i) factor decomposition, (ii) an identification strategy independent of the number of variables included in the dataset and (iii) a blockwise optimization algorithm for the correct selection of the Bayesian priors. Results show the presence of a structural break in 2008 and the higher responsiveness of the economy to monetary policy after that date.

Keywords: Large dataset; Factor models; Structural change; Great Recession; Monetary policy (search for similar items in EconPapers)
JEL-codes: C55 E32 E43 E52 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:83:y:2019:i:c:p:221-233

DOI: 10.1016/j.econmod.2019.02.012

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