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Measuring Monetary Policy - A Theoretical Foundation and an Application of the Factor Augmented Vector Autoregressive Approach

Fux, Sebastian (2008)
Department of Economics
Abstract
This essay uses the Factor Augmented Vector Autoregressive (FAVAR) approach to quantify the effects of monetary policy. Traditional methods to estimate the effects of monetary policy, such as Vector Autoregressive (VAR) models, have yielded unsatisfactory results, mainly due to sparse information sets included in the models. Augmenting the VAR model with factors summarizing the information of a vast dataset addresses this issue. Hence, the FAVAR framework is supposed to estimate the effects of monetary policy much more accurately. The estimates of the FAVAR model show that the price puzzle is minimized, if not eliminated. Additionally, the FAVAR approach allows calculation of impulse response functions for all variables of the initial... (More)
This essay uses the Factor Augmented Vector Autoregressive (FAVAR) approach to quantify the effects of monetary policy. Traditional methods to estimate the effects of monetary policy, such as Vector Autoregressive (VAR) models, have yielded unsatisfactory results, mainly due to sparse information sets included in the models. Augmenting the VAR model with factors summarizing the information of a vast dataset addresses this issue. Hence, the FAVAR framework is supposed to estimate the effects of monetary policy much more accurately. The estimates of the FAVAR model show that the price puzzle is minimized, if not eliminated. Additionally, the FAVAR approach allows calculation of impulse response functions for all variables of the initial dataset. This results in a much more comprehensive picture of the economy. The FAVAR analysis is based on 95 data series from the Unites States, reaching from February 1960 till February 2008. (Less)
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author
Fux, Sebastian
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
monetary policy, VAR model, Principal Component Analysis, Economics, econometrics, economic theory, economic systems, economic policy, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik
language
English
id
1334701
date added to LUP
2008-09-08
date last changed
2010-08-03 10:51:56
@misc{1334701,
  abstract     = {This essay uses the Factor Augmented Vector Autoregressive (FAVAR) approach to quantify the effects of monetary policy. Traditional methods to estimate the effects of monetary policy, such as Vector Autoregressive (VAR) models, have yielded unsatisfactory results, mainly due to sparse information sets included in the models. Augmenting the VAR model with factors summarizing the information of a vast dataset addresses this issue. Hence, the FAVAR framework is supposed to estimate the effects of monetary policy much more accurately. The estimates of the FAVAR model show that the price puzzle is minimized, if not eliminated. Additionally, the FAVAR approach allows calculation of impulse response functions for all variables of the initial dataset. This results in a much more comprehensive picture of the economy. The FAVAR analysis is based on 95 data series from the Unites States, reaching from February 1960 till February 2008.},
  author       = {Fux, Sebastian},
  keyword      = {monetary policy,VAR model,Principal Component Analysis,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {Measuring Monetary Policy - A Theoretical Foundation and an Application of the Factor Augmented Vector Autoregressive Approach},
  year         = {2008},
}