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Classical time-varying FAVAR models - estimation, forecasting and structural analysis

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  • Eickmeier, Sandra
  • Lemke, Wolfgang
  • Marcellino, Massimiliano

Abstract

We propose a classical approach to estimate factor-augmented vector autoregressive (FAVAR) models with time variation in the factor loadings, in the factor dynamics, and in the variance-covariance matrix of innovations. When the time-varying FAVAR is estimated using a large quarterly dataset of US variables from 1972 to 2007, the results indicate some changes in the factor dynamics, and more marked variation in the factors' shock volatility and their loading parameters. Forecasts from the time-varying FAVAR are more accurate than those from a constant parameter FAVAR for most variables and horizons when computed insample, for some variables in pseudo real time, mostly financial indicators. Finally, we use the time-varying FAVAR to assess how monetary transmission to the economy has changed. We find substantial time variation in the volatility of monetary policy shocks, and we observe that the reaction of GDP, the GDP deflator, inflation expectations and long-term interest rates to an equally-sized monetary policy shock has decreased since the early-1980s. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2011,04.

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Date of creation: 2011
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Handle: RePEc:zbw:bubdp1:201104

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

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Citations

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Cited by:
  1. Eickmeier, Sandra & Ng, Tim, 2011. "Forecasting national activity using lots of international predictors: An application to New Zealand," International Journal of Forecasting, Elsevier, vol. 27(2), pages 496-511, April.
  2. Eickmeier, Sandra & Lemke, Wolfgang & Marcellino, Massimiliano, 2011. "The Changing International Transmission of Financial Shocks: Evidence from a Classical Time-Varying FAVAR," CEPR Discussion Papers 8341, C.E.P.R. Discussion Papers.
  3. Xu Han & Atsushi Inoue, 2011. "Tests for Parameter Instability in Dynamic Factor Models," TERG Discussion Papers 306, Graduate School of Economics and Management, Tohoku University, revised May 2013.
  4. 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, vol. 30(1), pages 129-143.
  5. Brandon J. Bates & Mikkel Plagborg-Møller & James H. Stock & Mark W. Watson, . "Consistent factor estimation in dynamic factor models with structural instability," Working Paper 84631, Harvard University OpenScholar.
  6. Eickmeier, Sandra & Marcellino, Massimiliano & Prieto, Esteban, 2013. "Time Variation in Macro-Financial Linkages," CEPR Discussion Papers 9436, C.E.P.R. Discussion Papers.
  7. Breitung, Jörg & Eickmeier, Sandra, 2009. "Testing for structural breaks in dynamic factor models," Discussion Paper Series 1: Economic Studies 2009,05, Deutsche Bundesbank, Research Centre.
  8. Eickmeier, Sandra & Ng, Tim, 2011. "How do credit supply shocks propagate internationally? A GVAR approach," Discussion Paper Series 1: Economic Studies 2011,27, Deutsche Bundesbank, Research Centre.

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