Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models

Korobilis, Dimitris (2009) Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models. Discussion paper. University of Strathclyde, Glasgow.

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Abstract

The evolution of monetary policy in the U.S. is examined based on structural dynamic factor models. I extend the current literature which questions the stability of the monetary transmission mechanism, by proposing and studying time-varying parameters factor-augmented vector autoregressions (TVP-FAVAR), which allow for fast and efficient inference based on hundreds of explanatory variables. Different specifications are compared where the factor loadings, VAR coefficients and error covariances, or combinations of those, 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 results clearly suggest that the propagation of the monetary and non-monetary (exogenous) shocks has altered its behavior, and specifically in a fashion which supports smooth evolution rather than abrupt change. 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.

  • Item type:Monograph(Discussion paper)
    ID code:67799
    Dates:
    Date
    Event
    2009
    Published
    Notes:Published as a paper within the Discussion Papers in Economics, No. 09-14 (2009)
    Subjects:Social Sciences > Economic Theory
    Department:Strathclyde Business School > Economics
    Depositing user: Pure Administrator
    Date deposited:14 May 2019 10:38
    Last modified:25 Apr 2024 01:39
    URI:https://strathprints.strath.ac.uk/id/eprint/67799
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