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Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models

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  • Dimitris Korobilis

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

Abstract

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.

Suggested Citation

  • Dimitris Korobilis, 2009. "Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models," Working Paper series 35_09, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:35_09
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    More about this item

    Keywords

    Structural FAVAR; time varying parameter model; monetary policy;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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