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Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach
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TL;DR: In this article, a factor-augmented structural vector autoregressions (FAVAR) methodology is proposed to identify the monetary transmission mechanism. But the authors do not provide a comprehensive and coherent picture of the effect of monetary policy on the economy.
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Abstract: Structural vector autoregressions (VARs) are widely used to trace out the effect of monetary policy innovations on the economy. However, the sparse information sets typically used in these empirical models lead to at least two potential problems with the results. First, to the extent that central banks and the private sector have information not reflected in the VAR, the measurement of policy innovations is likely to be contaminated. A second problem is that impulse responses can be observed only for the included variables, which generally constitute only a small subset of the variables that the researcher and policymaker care about. In this paper we investigate one potential solution to this limited information problem, which combines the standard structural VAR analysis with recent developments in factor analysis for large data sets. We find that the information that our factor-augmented VAR (FAVAR) methodology exploits is indeed important to properly identify the monetary transmission mechanism. Overall, our results provide a comprehensive and coherent picture of the effect of monetary policy on the economy.
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Citations
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The international transmission channels of US supply and demand shocks: Evidence from a non-stationary dynamic factor model for the G7 countries
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Structural change and lag length in VAR models
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References
Macroeconomics and reality
TL;DR: In this article, the authors argue that the style in which their builders construct claims for a connection between these models and reality is inappropriate, to the point at which claims for identification in these models cannot be taken seriously.
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
TL;DR: In this article, the authors present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output, and the key features of their model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy.
The Quarterly Journal of Economics
Simon Kuznets
- 13 Aug 2024
Abstract: I. Formulation of the question. A brief historical survey, 381. — II. Recent discussion in Germany: Lederer, Loewe, Carrel, 386. — III. In what sense the equilibrium theory is valid, 392. — IV. The clement of time differences: Rosenstein-Rodan, further elaboration, 401. — V. Time differences and the cumulation of random changes, 408. — VI. Summary, 412.
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