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On the evolution of the monetary policy transmission mechanism

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Author Info

  • Koop, Gary
  • Leon-Gonzalez, Roberto
  • Strachan, Rodney W.

Abstract

This paper investigates whether the monetary transmission mechanism has changed or whether apparent changes are due to changes in the volatility of exogenous shocks. Also, the question of whether any changes have been gradual or abrupt is considered. A mixture innovation model is used which extends the class of time-varying vector autoregressive models with stochastic volatility. The advantage of our extension is that it allows us to estimate whether, where, when and how parameter change is occurring. Our empirical results indicate that the transmission mechanism, the volatility of exogenous shocks and the correlations between exogenous shocks are all changing.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 4 (April)
Pages: 997-1017

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:4:p:997-1017

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Structural VAR Monetary policy Bayesian Mixture innovation model Time-varying parameter model;

References

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  1. Kim, Sangjoon & Shephard, Neil & Chib, Siddhartha, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 361-93, July.
  2. Cogley, Timothy & Morozov, Sergei & Sargent, Thomas J., 2005. "Bayesian fan charts for U.K. inflation: Forecasting and sources of uncertainty in an evolving monetary system," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1893-1925, November.
  3. George, Edward I. & Sun, Dongchu & Ni, Shawn, 2008. "Bayesian stochastic search for VAR model restrictions," Journal of Econometrics, Elsevier, vol. 142(1), pages 553-580, January.
  4. John M. Maheu & Stephen Gordon, 2008. "Learning, forecasting and structural breaks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(5), pages 553-583.
  5. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  7. Boivin, Jean & Giannoni, Marc, 2006. "Has Monetary Policy Become More Effective?," CEPR Discussion Papers 5463, C.E.P.R. Discussion Papers.
  8. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
  9. M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2004. "Forecasting Time Series Subject to Multiple Structural Breaks," CESifo Working Paper Series 1237, CESifo Group Munich.
  10. Luboš Pástor & Robert F. Stambaugh, 2000. "The Equity Premium and Structural Breaks," CRSP working papers 519, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  11. Koop, Gary, 1996. "Parameter uncertainty and impulse response analysis," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 135-149.
  12. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  13. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  14. Gary Koop & Simon M. Potter, 2007. "Estimation and Forecasting in Models with Multiple Breaks," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 763-789.
  15. Giordani, Paolo & Kohn, Robert, 2008. "Efficient Bayesian Inference for Multiple Change-Point and Mixture Innovation Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 66-77, January.
  16. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  17. J. Durbin, 2002. "A simple and efficient simulation smoother for state space time series analysis," Biometrika, Biometrika Trust, vol. 89(3), pages 603-616, August.
  18. Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
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