IDEAS home Printed from https://ideas.repec.org/a/wly/japmet/v34y2019i1p18-25.html
   My bibliography  Save this article

The puzzling effects of monetary policy in VARs: Invalid identification or missing information?

Author

Listed:
  • Mark Kerssenfischer

Abstract

Standard vector autoregressions (VARs) often find puzzling effects of monetary policy shocks. Is this due to an invalid (recursive) identification scheme, or because the underlying small‐scale VAR neglects important information? I employ factor methods and external instruments to answer this question and provide evidence that the root cause is missing information. In particular, while a recursively identified dynamic factor model yields conventional monetary policy effects across the board, a small‐scale VAR identified via external instruments does not. Importantly, the discrepancy between both models largely disappears once the information set of the VAR is augmented via factors. This finding is comforting news for the recent monetary literature. Two leading empirical advances with different underlying assumptions—namely external instruments (applied to a factor‐augmented VAR) and dynamic factor models (identified recursively)—find very similar effects of monetary policy shocks, cross‐verifying each other.

Suggested Citation

  • Mark Kerssenfischer, 2019. "The puzzling effects of monetary policy in VARs: Invalid identification or missing information?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(1), pages 18-25, January.
    • Handle: RePEc:wly:japmet:v:34:y:2019:i:1:p:18-25
    DOI: 10.1002/jae.2647
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/jae.2647
    Download Restriction: no
    File URL: https://libkey.io/10.1002/jae.2647?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yang, Yang & Zhang, Jiqiang, 2021. "Effects of monetary policy on the exchange rates: A Time-varying analysis," Finance Research Letters, Elsevier, vol. 43(C).
    2. Kerssenfischer, Mark, 2019. "Information Effects of Euro Area Monetary Policy: New evidence from high-frequency futures data," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203524, Verein für Socialpolitik / German Economic Association.
    3. Carsten Jentsch & Kurt G. Lunsford, 2022. "Asymptotically Valid Bootstrap Inference for Proxy SVARs," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(4), pages 1876-1891, October.
    4. Giorgia De Nora, 2021. "Factor Augmented Vector-Autoregression with narrative identification. An application to monetary policy in the US," Working Papers 934, Queen Mary University of London, School of Economics and Finance.
    5. Martin Bruns, 2019. "Proxy VAR models in a data-rich environment," University of East Anglia School of Economics Working Paper Series 2019-03, School of Economics, University of East Anglia, Norwich, UK..
    6. Dominik Bertsche, 2019. "The effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approachThe effects of oil supply shocks on the macroeconomy: a Proxy-FAVAR approach," Working Paper Series of the Department of Economics, University of Konstanz 2019-06, Department of Economics, University of Konstanz.
    7. Maurizio Daniele & Julie Schnaitmann, 2019. "A Regularized Factor-augmented Vector Autoregressive Model," Papers 1912.06049, arXiv.org.
    8. Stefan Schiman & Harald Badinger, 2020. "Measuring Monetary Policy with Residual Sign Restrictions at Known Shock Dates," WIFO Working Papers 608, WIFO.
    9. Paul Hubert & Frédérique Savignac, 2023. "Monetary Policy and Labor Income Inequality: the Role of Extensive and Intensive Margins," Working papers 913, Banque de France.
    10. Juho Koistinen & Bernd Funovits, 2022. "Estimation of Impulse-Response Functions with Dynamic Factor Models: A New Parametrization," Papers 2202.00310, arXiv.org, revised Feb 2022.
    11. Bruns, Martin, 2021. "Proxy Vector Autoregressions in a Data-rich Environment," Journal of Economic Dynamics and Control, Elsevier, vol. 123(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:japmet:v:34:y:2019:i:1:p:18-25. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0883-7252/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.