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Factor Augmented Vector-Autoregression with narrative identification. An application to monetary policy in the US

Author

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  • Giorgia De Nora

    (Queen Mary University of London)

Abstract

I extend the Bayesian Factor-Augmented Vector Autoregressive model (FAVAR) to incorporate an identification scheme based on an exogenous variable approach. A Gibbs sampling algorithm is provided to estimate the posterior distributions of the models parameters. I estimate the effects of a monetary policy shock in the United States using the proposed algorithm, and find that an increase in the Federal Fund Rate has contractionary effects on both the real and financial sides of the economy. Furthermore, the paper suggests that data-rich models play an important role in mitigating price and real economic puzzles in the estimated impulse responses as well as the discrepancies among the impulse responses obtained with different monetary policy instruments.

Suggested Citation

  • Giorgia De Nora, 2021. "Factor Augmented Vector-Autoregression with narrative identification. An application to monetary policy in the US," Working Papers 934, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:934
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    information sufficiency; factor-augmented VARs; instrumental variables; monetary policy; structural VARs;
    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
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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