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A Factor Augmented Vector Autoregressive (FAVAR) approach for Monetary Policy: Replication of the empirical results in “Measuring the effects of Monetary Policy”

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  • Luvsannyam, Davaajargal
  • Batmunkh, Khuslen

Abstract

In recent paper, Bernanke, Boivin and Eliasz’s (2005) study presented a model of how the monetary policy rate affects the large subset of the variables that the researcher and policy-maker care about. Several criticisms of the Vector autoregression (VAR) approach which is developed by the considerable literature of Bernanke and Blinder (1992) and Sims (1992) to monetary policy identification center around the relatively small amount of information used by low-dimensional VARs. In that case, FAVAR methodology leads to broadly plausible estimates for the responses of a wide variety of macroeconomic variables to monetary policy shocks. Bernanke, Boivin and Eliasz also provided empirical support for this model based on an analysis of the federal fund rate and other macroeconomic indicators of US economy between the early 1959s and late 2001. This paper replicates the main empirical findings of Bernanke, Boivin and Eliasz (2005).

Suggested Citation

  • Luvsannyam, Davaajargal & Batmunkh, Khuslen, 2018. "A Factor Augmented Vector Autoregressive (FAVAR) approach for Monetary Policy: Replication of the empirical results in “Measuring the effects of Monetary Policy”," MPRA Paper 89814, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89814
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    References listed on IDEAS

    as
    1. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    2. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    3. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    FAVAR; 2 step principal component approach; likelihood based approach; monetary policy shock; gibbs sampling;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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