Factor-augmented VARs (FAVARs) have combined standard VARs with factor analysis to exploit large data sets in the study of monetary policy. FAVARs enjoy a number of advantages over VARs: they allow a better identification of the monetary policy shock; they can avoid the use of a single variable to proxy theoretical constructs, such as the output gap; they allow researchers to compute impulse responses for hundreds of variables. Their shortcoming, however, is that the factors are not identified and, therefore, lack any economic interpretation. This paper seeks to provide an interpretation to the factors. We propose a novel Structural Factor-Augmented VAR (SFAVAR) model, where the factors have a clear meaning: 'Real Activity' factor, 'Price Pressures' factor, 'Financial Market' factor, 'Credit Conditions' factor, 'Expectations' factor, etc. The paper employs a Bayesian approach to extract the factors and jointly estimate the model. This framework is then suited to study the effects on a wide range of macroeconomic variables of monetary policy and non-policy shocks.
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Paper provided by EconWPA in its series Macroeconomics with number
0503023.
Find related papers by JEL classification: C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005.
"Monetary Policy in Real Time,"
Working Papers
284, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005.
"Monetary Policy in Real Time,"
NBER Chapters,
in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224
National Bureau of Economic Research, Inc.
[Downloadable!]
Marvin J. Barth III & Valerie A. Ramey, 2002.
"The Cost Channel of Monetary Transmission,"
NBER Chapters,
in: NBER Macroeconomics Annual 2001, Volume 16, pages 199-256
National Bureau of Economic Research, Inc.
[Downloadable!]
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