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Monetary Policy Transmission Mechanism And Dynamic Factor Models


  • Andreea ROSOIU

    () (The Academy of Economic Studies, Bucharest, Romania)


The main objective of a Central Bank is price stability, without neglecting, however, a sustainable economic growth in the long run. Therefore, an important challenge is to identify whether the effect of monetary policy has changed over time and for this purpose, a Dynamic Factor Model with time-varying parameters is estimated. The model is applied to Romanian economy, on a sample database consisting of 90 time series representing various macroeconomic variables. Monthly data, starting with 2000 and ending with 2013 are being used for the analysis. The reason for using a large dataset is to avoid issues such as omitting important information when considering a small set of variables. A much smaller number of Factors is extracted by using Principal Component Analysis and with these factors the TVP-FAVAR model is estimated. Time variation of the parameters allows for o comparative analysis of the monetary policy transmission mechanism in time. Once the impulse-response functions are estimated, several conclusions are to be drawn, such as: whether monetary policy actions have or do not have an impact over the evolution of the rest of the economy and whether the effect of these measures have changed over the years.

Suggested Citation

  • Andreea ROSOIU, 2014. "Monetary Policy Transmission Mechanism And Dynamic Factor Models," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 14, pages 199-206, December.
  • Handle: RePEc:aic:revebs:y:2014:d:14:rosoius

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    References listed on IDEAS

    1. Dimitris Korobilis, 2013. "Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models-super-," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(2), pages 157-179, April.
    2. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
    3. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 387-422.
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    More about this item


    Factor Augmented Vector Autoregression; Monetary Policy Transmission Mechanism; Romanian Economy; Time Varying Parameters;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access


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