Structural Factor-Augmented VAR (Sfavar) and the Effects of Monetary Policy
Structural Factor-Augmented VAR (Sfavar) and the Effects of Monetary Policy

Author: Francesco Belviso

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Published: 2005

Total Pages: 0

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Factor-augmented VARs (FAVARs) have combined standard VARs with factor analysis to exploit large data sets in the study of monetary policy. FAVARs enjoy a number of advantages over VARs: they allow a better identification of the monetary policy shock; they can avoid the use of a single variable to proxy theoretical constructs, such as the output gap; they allow researchers to compute impulse responses for hundreds of variables. Their shortcoming, however, is that the factors are not identified and, therefore, lack any economic interpretation. This paper seeks to provide an interpretation to the factors. We propose a novel Structural Factor-Augmented VAR (SFAVAR) model, where the factors have a clear meaning: Real Activity factor, Price Pressures factor, Financial Market factor, Credit Conditions factor, Expectations factor, etc. The paper employs a Bayesian approach to extract the factors and jointly estimate the model. This framework is then suited to study the effects on a wide range of macroeconomic variables of monetary policy and non-policy shocks.

Measuring the Effects of Monetary Policy
Measuring the Effects of Monetary Policy

Author: Ben Bernanke

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Published: 2004

Total Pages: 47

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"Structural vector autoregressions (VARs) are widely used to trace out the effect of monetary policy innovations on the economy. However, the sparse information sets typically used in these empirical models lead to at least two potential problems with the results. First, to the extent that central banks and the private sector have information not reflected in the VAR, the measurement of policy innovations is likely to be contaminated. A second problem is that impulse responses can be observed only for the included variables, which generally constitute only a small subset of the variables that the researcher and policymaker care about. In this paper we investigate one potential solution to this limited information problem, which combines the standard structural VAR analysis with recent developments in factor analysis for large data sets. We find that the information that our factor-augmented VAR (FAVAR) methodology exploits is indeed important to properly identify the monetary transmission mechanism. Overall, our results provide a comprehensive and coherent picture of the effect of monetary policy on the economy"--National Bureau of Economic Research web site

Factor Augmented Vector-autoregression with Narrative Identification
Factor Augmented Vector-autoregression with Narrative Identification

Author: Giorgia De Nora

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Published: 2021

Total Pages:

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I extend the Bayesian Factor-Augmented Vector Autoregressive model (FAVAR) to incorporate an identification scheme based on an exogenous variable approach. A Gibbs sampling algorithm is provided to estimate the posterior distributions of the models parameters. I estimate the effects of a monetary policy shock in the United States using the proposed algorithm, and find that an increase in the Federal Fund Rate has contractionary effects on both the real and financial sides of the economy. Furthermore, the paper suggests that data-rich models play an important role in mitigating price and real economic puzzles in the estimated impulse responses as well as the discrepancies among the impulse responses obtained with different monetary policy instruments.

Proxy Structural Vector Autoregressions, Informational Sufficiency and the Role of Monetary Policy
Proxy Structural Vector Autoregressions, Informational Sufficiency and the Role of Monetary Policy

Author: Mirela S. Miescu

Publisher:

Published: 2019

Total Pages:

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We show that the contemporaneous and longer horizon impulse responses estimated using small-scale Proxy structural vector autoregressions (SVARs) can be severely biased in the presence of information insufficiency. Instead, we recommend the use of a Proxy Factor Augmented VAR (FAVAR) model that remains robust in the presence of this problem. In an empirical exercise, we demonstrate that this issue has important consequences for the estimated impact of monetary policy shocks in the US. We find that the impulse responses of real activity and prices estimated using a Proxy FAVAR are substantially larger and more persistent than those suggested by a small-scale Proxy SVAR.

Measuring Monetary Policy in the UK
Measuring Monetary Policy in the UK

Author: Gianluca Laganà

Publisher:

Published: 2005

Total Pages: 0

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This paper investigates the determinants of UK interest rates using a factor-augmented vector autoregression model (VAR), similar to the one suggested by Bernanke, Boivin and Eliasz (Quarterly Journal of Economics, Vol. 120 (2005), No. 1, pp. 387-422). The method allows impulse response functions to be generated for all the variables in the data set and so is able to provide a more complete description of UK monetary policy than is possible using standard VARs. The results show that the addition of factors to a benchmark VAR generates a more reasonable characterization of the effects of unexpected increases in the interest rate and, in particular, gets rid of a 'price puzzle' response present in the benchmark VAR. The extra information generated by this method, however, also brings to light other identification issues, notably house price and stock market 'puzzles'. Importantly the out-of-sample prediction performance of the factor-augmented VARs is also very good and strongly superior to those of the benchmark VAR and simple autoregression models.

Estimating the Impact, Transmission Mechanism and Reaction Function of Monetary Policy
Estimating the Impact, Transmission Mechanism and Reaction Function of Monetary Policy

Author: Dawit Legesse Senbet

Publisher:

Published: 2007

Total Pages: 362

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This dissertation employs factor-augmented vector autoregressive (FAVAR) models to investigate the impact, transmission mechanism and reaction function of monetary policy. The recent development of augmenting dynamic factor analysis with the vector autoregressive (VAR) models, pioneered by Bernanke et al. (2005), has led to advances in monetary policy analysis. The new approach bases measurements of monetary policy on large data sets that approximate the true information set of policymakers. This is in contrast to low dimensional VAR models. The FAVAR model summarizes information from large data set by a few factors that are incorporated into VAR models. The first essay investigates the impact of monetary policy on a wide range of macroeconomic indicators for the United States, Canada, the U.K., Japan and France using FAVAR models. I also examine the influence of United States' monetary policy on the other countries in the sample. This essay incorporates between 70 and 80 monthly macro variables for each country. The results show that, first, the FAVAR model eliminates the "price puzzle" response for all countries. Second, monetary policy has plausible impacts on a wide range of economic variables. Third, there is evidence of United States' monetary policy influence on Canada, the U.K. and Japan. In the second essay, I investigate the channels of monetary policy transmission in the United States using the FAVAR models. This essay builds on the debates on whether monetary policy works through the credit channel, in addition to the traditional interest rate channel. I include 154 United States' monthly macro variables. The findings support the existence of the credit channel in the United States. The third essay builds on the seminal work of Taylor (1993) to study the reaction functions of monetary policymakers in the United States, Canada, the U.K. and Japan. I include monthly data on 80 to 150 macro variables in the FAVAR model to investigate the policy reaction functions. The findings show that monetary policymakers react to many variables including capacity utilization rates, unemployment rates, monetary aggregates, exchange rates, and long-term interest rates in addition to the inflation and the output gaps.

Global Forces and Monetary Policy Effectiveness
Global Forces and Monetary Policy Effectiveness

Author: Jean Boivin

Publisher:

Published: 2010

Total Pages: 53

ISBN-13:

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In this paper, we quantify the changes in the relationship between international forces and many key US macroeconomic variables over the 1984-2005 period, and analyze changes in the monetary policy transmission mechanism. We do so by estimating a Factor-Augmented VAR on a large set of US and international data series. We find that the role of international factors in explaining US variables has been changing over the 1984-2005 period. However, while some US series have become more correlated with global factors, there is little evidence suggesting that these factors have become systematically more important. We don't find strong evidence of a change in the transmission mechanism of monetary policy due to global forces. Taking our point estimates literally, global forces do not seem to have played an important role in the US monetary transmission mechanism between 1984 and 1999. In addition, since the year 2000, the initial response of the US economy following a monetary policy shock -- the first 6 to 8 quarters -- is essentially the same as the one that has been observed in the 1984-1999 period. However, point estimates suggest that the growing importance of global forces might have contributed to reducing some of the persistence in the responses, two or more years after the shocks. Overall, we conclude that if global forces have had an effect on the monetary transmission mechanism, this is a recent phenomenon.