The author is grateful to John Geweke, Gary Koop, John Maheu, Simon Potter for helpful discussions, and seminar participants at the Rimini Center for Economic Analysis, Banca d'Italia and Université Catholique Louvain for helpful discussions and comments. Comments from the Editor and two anonymous referees have helped to substantially improve this article, for which I am grateful.
Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models*
Article first published online: 2 JAN 2012
© Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2012
Oxford Bulletin of Economics and Statistics
Volume 75, Issue 2, pages 157–179, April 2013
How to Cite
Korobilis, D. (2013), Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models. Oxford Bulletin of Economics and Statistics, 75: 157–179. doi: 10.1111/j.1468-0084.2011.00687.x
- Issue published online: 4 MAR 2013
- Article first published online: 2 JAN 2012
- Final Manuscript Received: October 2011
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.