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Structural Factor-Augmented VARs (SFAVARs) and the Effects of Monetary Policy

Author

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  • Belviso Francesco

    (Princeton University and University of Chicago)

  • Milani Fabio

    (University of California, Irvine)

Abstract

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 avoid the use of a single variable to proxy theoretical constructs; they allow researchers to compute impulse responses for hundreds of variables. Their shortcoming, however, is that the factors are not identified and lack an 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, Inflation factor, Financial Market factor, Credit factor, Expectations factor, and so forth. The paper employs a Bayesian approach to jointly estimate the factors and the dynamic model. This framework is then used to study the effects of monetary policy on a wide range of macroeconomic variables.

Suggested Citation

  • Belviso Francesco & Milani Fabio, 2006. "Structural Factor-Augmented VARs (SFAVARs) and the Effects of Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-46, December.
    • Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:3:n:2
    DOI: 10.2202/1534-5998.1443
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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