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Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models

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  • Dimitris Korobilis

    ()
    ( Department of Economics, University of Strathclyde; The Rimini Center for Economic Analysis)

Abstract

This paper extends the current literature which questions the stability of the monetary transmission mechanism, by using a Dynamic Factor Model with time-varying parameters, which allows fast and efficient inference based on hundreds of explanatory variables. Different specifications are compared where the factor loadings, VAR coefficients and error covariances may change gradually in every period or be subject to small breaks. The model is applied to 157 post-World War II U.S. quarterly macroeconomic variables. The most notable changes were in the responses of real activity measures, prices and monetary aggregates, while other key indicators of the economy remained relatively unaffected.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 35_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:35_09

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Keywords: Structural FAVAR; time varying parameter model; monetary policy;

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Citations

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Cited by:
  1. Baumeister, Christiane & Liu, Philip & Mumtaz, Haroon, 2013. "Changes in the effects of monetary policy on disaggregate price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 543-560.
  2. Huang, Y-F., 2012. "Forecasting Chinese inflation and output: A Bayesian vector autoregressive approach," MPRA Paper 41933, University Library of Munich, Germany.
  3. Koop, Gary & Korobilis, Dimitris, 2010. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," Foundations and Trends(R) in Econometrics, now publishers, vol. 3(4), pages 267-358, July.
  4. Kemal Bagzibagli, 2012. "Monetary Transmission Mechanism and Time Variation in the Euro Area," Discussion Papers 12-12, Department of Economics, University of Birmingham.
  5. 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) 896, Bank of Italy, Economic Research and International Relations Area.
  6. Jouchi Nakajima, 2011. "Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications," IMES Discussion Paper Series 11-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  7. Joshua C.C. Chan & Eric Eisenstat, 2013. "Gibbs Samplers for VARMA and Its Extensions," ANU Working Papers in Economics and Econometrics 2013-604, Australian National University, College of Business and Economics, School of Economics.
  8. 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.
  9. Dimitris Korobilis & Michelle Gilmartin, 2011. "The Dynamic Effects of U.S. Monetary Policy on State Unemployment," Working Paper Series 12_11, The Rimini Centre for Economic Analysis.
  10. Miguel Belmonte & Gary Koop, 2013. "Model Switching and Model Averaging in Time-Varying Parameter Regression Models," Working Papers 1302, University of Strathclyde Business School, Department of Economics.
  11. Andrew Stuart Duncan & Alain Kabundi, 2011. "Global Financial Crises and Time-varying Volatility Comovement in World Equity Markets," Working Papers 253, Economic Research Southern Africa.

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