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Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models

  • Dimitris Korobilis


    ( Department of Economics, University of Strathclyde; The Rimini Center for Economic Analysis)

This paper extends the current literature which questions the stability of the monetary transmission mechanism, by using a Dynamic Factor Model with time-varying parameters, which allows fast and efficient inference based on hundreds of explanatory variables. Different specifications are compared where the factor loadings, VAR coefficients and error covariances may change gradually in every period or be subject to small breaks. The model is applied to 157 post-World War II U.S. quarterly macroeconomic variables. The most notable changes were in the responses of real activity measures, prices and monetary aggregates, while other key indicators of the economy remained relatively unaffected.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 35_09.

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Date of creation: Jan 2009
Date of revision: Jan 2009
Handle: RePEc:rim:rimwps:35_09
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