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Solving the Price Puzzle Via A Functional Coefficient Factor-Augmented VAR Model

Author

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  • Zongwu Cai

    (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA)

  • Xiyuan Liu

    (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA)

Abstract

Effects of monetary policy shocks on large amounts of macroeconomic variables are identified by a new class of functional-coefficient factor-augmented vector autoregressive (FAVAR) models, which allows coefficients of classical FAVAR models to vary with some variable. In the empirical study, we analyze the impulse response functions estimated by the newly proposed model and compare our results with those from classical FAVAR models. Our empirical finding is that our new model has an ability to eliminate the well-known price puzzle without adding new variables into the dataset.

Suggested Citation

  • Zongwu Cai & Xiyuan Liu, 2021. "Solving the Price Puzzle Via A Functional Coefficient Factor-Augmented VAR Model," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202106, University of Kansas, Department of Economics, revised Jan 2021.
    • Handle: RePEc:kan:wpaper:202106
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    File URL: http://www2.ku.edu/~kuwpaper/2021Papers/202106.pdf
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    More about this item

    Keywords

    Factor-augmented vector autoregressive; Functional coefficient models; Impulse response functions; Nonparametric estimation; Price puzzle;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • 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
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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