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- Title
Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models<sup>*</sup> Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models.
- Authors
Korobilis, Dimitris
- Abstract
This article extends the current literature which questions the stability of the monetary transmission mechanism, by proposing a factor-augmented vector autoregressive (VAR) model with time-varying coefficients and stochastic volatility. The VAR coefficients and error covariances may change gradually in every period or be subject to abrupt breaks. The model is applied to 143 post-World War II quarterly variables fully describing the US economy. I show that both endogenous and exogenous shocks to the US economy resulted in the high inflation volatility during the 1970s and early 1980s. The time-varying factor augmented VAR produces impulse responses of inflation which significantly reduce the price puzzle. Impulse responses of other indicators of the economy show that the most notable changes in the transmission of unanticipated monetary policy shocks occurred for gross domestic product, investment, exchange rates and money.
- Subjects
UNITED States; MATHEMATICAL models of monetary policy; VECTOR autoregression model; GROSS domestic product; FOREIGN exchange rates; MARKET volatility; WORLD War II &; economics; UNITED States economy, 1945-; PRICE inflation
- Publication
Oxford Bulletin of Economics & Statistics, 2013, Vol 75, Issue 2, p157
- ISSN
0305-9049
- Publication type
Article
- DOI
10.1111/j.1468-0084.2011.00687.x