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Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models

Korobilis, D (2013) 'Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models.' Oxford Bulletin of Economics and Statistics, 75 (2). 157 - 179. ISSN 0305-9049

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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. © Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2012.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 23 Nov 2016 12:07
Last Modified: 07 Aug 2019 21:15
URI: http://repository.essex.ac.uk/id/eprint/17950

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