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), pp. 157-179. (doi: 10.1111/j.1468-0084.2011.00687.x)

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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.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Korompilis Magkas, Professor Dimitris
Authors: Korobilis, D.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Oxford Bulletin of Economics and Statistics
ISSN:0305-9049
ISSN (Online):1468-0084
Published Online:02 January 2012

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