Proxy VAR Models in a Data-Rich Environment

Martin Bruns

No 1831, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Structural VAR models require two ingredients: (i) Informational sufficiency, and (ii) a valid identification strategy. These conditions are unlikely to be met by small-scale recursively identified VAR models. I propose a Bayesian Proxy Factor-Augmented VAR (BP-FAVAR) to combine a large information set with an identification scheme based on an external instrument. In an application to monetary policy shocks I find that augmenting a standard small-scale Proxy VAR by factors from a large set of financial variables changes the model dynamics and delivers price responses which are more in line with economic theory. A second application shows that an exogenous increase in uncertainty affects disaggregated investment series more negatively than consumption series.

Keywords: Dynamic factor models; external instruments; monetary policy; uncertainty shocks (search for similar items in EconPapers)
JEL-codes: C38 E60 (search for similar items in EconPapers)
Pages: 43 p.
Date: 2019
New Economics Papers: this item is included in nep-mac and nep-ore
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Working Paper: Proxy VAR models in a data-rich environment (2019)
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