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Large Datasets, Small Models and Monetary Policy in Europe

Author

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  • Favero, Carlo A.
  • Marcellino, Massimiliano

Abstract

Nowadays a considerable amount of information on the behaviour of the economy is readily available, in the form of large datasets of macroeconomic variables. Central bankers can be expected to base their decisions on this very large information set. Yet the academic profession has shown a clear preference for using small models to highlight stylized facts and to implement policy simulation exercises. Omitted information is then a potentially relevant problem. Recent time-series techniques for the analysis of large datasets have shown how vast an amount of information can be captured by few factors. In this paper we combine factors extracted from large datasets with more traditional small-scale models to analyse monetary policy in Europe. In particular, we model hundreds of macroeconomic variables with a dynamic factor model, and summarize their informational content with a few estimated factors. These factors are then used as instruments in the estimation of forward-looking Taylor rules, and as additional regressors in structural VARs. The latter are then used to evaluate the effects of unexpected and systematic monetary policy.

Suggested Citation

  • Favero, Carlo A. & Marcellino, Massimiliano, 2001. "Large Datasets, Small Models and Monetary Policy in Europe," CEPR Discussion Papers 3098, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3098
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    Citations

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    Cited by:

    1. Marcellino, Massimliano, 2004. "Forecasting EMU macroeconomic variables," International Journal of Forecasting, Elsevier, vol. 20(2), pages 359-372.
    2. Massimiliano Marcellino & Carlo A. Favero & Francesca Neglia, 2005. "Principal components at work: the empirical analysis of monetary policy with large data sets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(5), pages 603-620.
    3. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
    4. Fabio Bagliano & Claudio Morana, 2008. "Factor vector autoregressive estimation: a new approach," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 3(1), pages 15-23, June.
    5. Francesco Daveri & Andrea Mascotto, "undated". "The IT revolution across the U.S. states," Working Papers 226, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    6. Marcellino, Massimiliano, 2006. "Some stylized facts on non-systematic fiscal policy in the Euro area," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 461-479, September.
    7. Reichlin, Lucrezia, 2002. "Factor Models in Large Cross-Sections of Time Series," CEPR Discussion Papers 3285, C.E.P.R. Discussion Papers.
    8. Fabio C. Bagliano & Claudio Morana, 2006. "A New Approach to Factor Vector Autoregressive Estimation with an Application to Large-Scale Macroeconometric Modelling," Carlo Alberto Notebooks 28, Collegio Carlo Alberto.
    9. Giannone, Domenico & Reichlin, Lucrezia & Sala, Luca, 2002. "Tracking Greenspan: Systematic and Unsystematic Monetary Policy Revisited," CEPR Discussion Papers 3550, C.E.P.R. Discussion Papers.
    10. Hilde C. Bjørnland, 2005. "Monetary policy and the illusionary exchange rate puzzle," Working Paper 2005/11, Norges Bank.
    11. Hilde C. Bjørnland, 2008. "Monetary Policy and Exchange Rate Interactions in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 197-221, March.
    12. 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.
    13. Victor Bystrov, 2006. "Forecasting Emerging Market Indicators: Brazil and Russia," Economics Working Papers ECO2006/12, European University Institute.
    14. repec:bla:ecorec:v:93:y:2017:i:302:p:465-483 is not listed on IDEAS
    15. Mark J. Holmes & Arthur Grimes, 2005. "Is there long-run convergence of regional house prices in the UK?," Working Papers 05_11, Motu Economic and Public Policy Research.

    More about this item

    Keywords

    dynamic factors; monetary policy; small models;

    JEL classification:

    • 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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