Assessing the transmission of monetary policy using dynamic factor models

Dimitris Korobilis

MPRA Paper from University Library of Munich, Germany

Abstract: This paper extends the current literature which questions the stability of the monetary transmission mechanism, by proposing a factor-augmented vector autoregressive (VAR) model with time-varying coefficients and stochastic volatility. The VAR coefficients and error covariances may change gradually in every period or be subject to abrupt breaks. The model is applied to 143 post-World War II quarterly variables fully describing the US economy. I show that both endogenous and exogenous shocks to the US economy resulted in the high inflation volatility during the 1970s and early 1980s. The time-varying factor augmented VAR produces impulse responses of inflation which significantly reduce the price puzzle. Impulse responses of other indicators of the economy show that the most notable changes in the transmission of unanticipated monetary policy shocks occurred for GDP, investment, exchange rates and money.

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)
Date: 2009-05, Revised 2010-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://mpra.ub.uni-muenchen.de/27593/1/MPRA_paper_27593.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/35087/2/MPRA_paper_35087.pdf revised version (application/pdf)

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 Shocks Using Dynamic Factor Models (2009)
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:pra:mprapa:27593

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