Large Datasets, Factor-augmented and Factor-only Vector Autoregressive Models, and the Economic Consequences of Mrs Thatcher

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Abstract

We investigate methods of capturing the salient characteristics of very large datasets in an investigation of UK and US macroeconomic policy, using factor-augmented VAR (FAVAR) models. We also estimate structural factor-only VAR (FOVAR) models and examine the impact of aggregate demand and aggregate supply. In a further empirical application, we find that while there is some evidence of increased macroeconomic flexibility in the USA as well as the UK since the late 1980s, the speed of macroeconomic adjustment is more marked in the UK economy post-1987, possibly reflecting the UK labour market reforms of the Thatcher government in the 1980s.

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