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Changes in the transmission of monetary policy: evidence from a time-varying factor-augmented VAR

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  • Baumeister, Christiane

    ()
    (Bank of Canada)

  • Liu, Philip

    ()
    (International Monetary Fund)

  • Mumtaz, Haroon

    ()
    (Bank of England)

Abstract

This paper re-examines the evolution of the US monetary transmission mechanism using an empirical framework that incorporates substantially more information than the standard tri-variate VAR model used in most previous studies. In particular, we employ an extended version of a factor-augmented VAR, where we introduce time variation in the coefficients and stochastic volatilities in the variances of the shocks. Our formulation has two substantive advantages over earlier work: (i) the additional information summarised by the common factors that are extracted from a large panel of aggregate and disaggregate variables improves the identification of the monetary policy shocks since the factors capture more accurately the amount of information analysed by the monetary authority, (ii) we are able to estimate the time-varying effects of monetary policy surprises on macroeconomic aggregates and disaggregate prices and quantities of personal consumption expenditures. Our main results indicate that time variation is a dominant feature of key macroeconomic variables and their components. In analysing the temporal evolution of disaggregate dynamics, we uncover a considerable amount of heterogeneity in sectoral price responses which suggests that monetary policy actions exert an important, and potentially long-lasting, influence on relative prices in the US economy.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 401.

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Length: 51 pages
Date of creation: 28 Oct 2010
Date of revision:
Handle: RePEc:boe:boeewp:0401

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Keywords: FAVAR; time-varying parameters; monetary transmission;

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References

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  1. Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2010. "Minimal State Variable Solutions to Markov-switching Rational Expectations Models," Emory Economics, Department of Economics, Emory University (Atlanta) 1003, Department of Economics, Emory University (Atlanta).
  2. Cogley, Timothy W. & Morozov, Sergei & Sargent, Thomas J., 2003. "Bayesian fan charts for UK inflation: Forecasting and sources of uncertainty in an evolving monetary system," CFS Working Paper Series 2003/44, Center for Financial Studies (CFS).
  3. Altissimo, Filippo & Mojon, Benoit & Zaffaroni, Paolo, 2009. "Can aggregation explain the persistence of inflation?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(2), pages 231-241, March.
  4. Boivin, Jean & Giannoni, Marc P. & Mihov, Ilian, 2006. "Sticky prices and monetary policy: Evidence from disaggregated US data," CFS Working Paper Series 2007/14, Center for Financial Studies (CFS).
  5. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 119-147, September.
  6. Mark Bils & Peter J. Klenow & Oleksiy Kryvtsov, 2003. "Sticky prices and monetary policy shocks," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-9.
  7. Marco Del Negro & Christopher Otrok, 2008. "Dynamic factor models with time-varying parameters: measuring changes in international business cycles," Staff Reports 326, Federal Reserve Bank of New York.
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Cited by:
  1. Massimiliano Marcellino & Mario Porqueddu & Fabrizio Venditti, 2013. "Short-term GDP forecasting with a mixed frequency dynamic factor model with stochastic volatility," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 896, Bank of Italy, Economic Research and International Relations Area.
  2. Garreth Rule, 2011. "Issuing central bank securities," Handbooks, Centre for Central Banking Studies, Bank of England, Centre for Central Banking Studies, Bank of England, edition 1, number 30.
  3. Dario Caldara & Richard Harrison & Anna Lipinska, 2012. "Practical tools for policy analysis in DSGE models with missing channels," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-72, Board of Governors of the Federal Reserve System (U.S.).
  4. Eickmeier, Sandra & Lemke, Wolfgang & Marcellino, Massimiliano, 2011. "Classical time-varying FAVAR models - Estimation, forecasting and structural analysis," CEPR Discussion Papers 8321, C.E.P.R. Discussion Papers.
  5. Garreth Rule, 2012. "Collateral management in central bank policy operations," Handbooks, Centre for Central Banking Studies, Bank of England, Centre for Central Banking Studies, Bank of England, edition 1, number 31.
  6. Barnett, Alina & Mumtaz, Haroon & Theodoridis, Konstantinos, 2014. "Forecasting UK GDP growth and inflation under structural change. A comparison of models with time-varying parameters," International Journal of Forecasting, Elsevier, Elsevier, vol. 30(1), pages 129-143.
  7. Sohrab Rafiq, 2013. "The Growth and Stabilization Properties of Fiscal Policy in Malaysia," IMF Working Papers 13/149, International Monetary Fund.
  8. Colin Ellis & Haroon Mumtaz & Pawel Zabczyk, 2014. "What Lies Beneath? A Time‐varying FAVAR Model for the UK Transmission Mechanism," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 0(576), pages 668-699, 05.

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