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The B.E. Journal of Macroeconomics

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Structural Factor-Augmented VARs (SFAVARs) and the Effects of Monetary Policy

Francesco Belviso
  • 1Princeton University and University of Chicago,
/ Fabio Milani
  • 2University of California, Irvine,
Published Online: 2006-12-04 | DOI: https://doi.org/10.2202/1534-5998.1443

Factor-augmented VARs (FAVARs) have combined standard VARs with factor analysis to exploit large data sets in the study of monetary policy. FAVARs enjoy a number of advantages over VARs: they allow a better identification of the monetary policy shock; they avoid the use of a single variable to proxy theoretical constructs; they allow researchers to compute impulse responses for hundreds of variables. Their shortcoming, however, is that the factors are not identified and lack an economic interpretation.This paper seeks to provide an interpretation to the factors. We propose a novel Structural Factor-Augmented VAR (SFAVAR) model, where the factors have a clear meaning: Real Activity factor, Inflation factor, Financial Market factor, Credit factor, Expectations factor, and so forth. The paper employs a Bayesian approach to jointly estimate the factors and the dynamic model. This framework is then used to study the effects of monetary policy on a wide range of macroeconomic variables.

Keywords: VAR; dynamic factors; monetary policy; structural FAVAR

About the article

Published Online: 2006-12-04



Citation Information: Topics in Macroeconomics, ISSN (Online) 1534-5998, DOI: https://doi.org/10.2202/1534-5998.1443. Export Citation

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[1]
FABIO MILANI and JOHN TREADWELL
Journal of Money, Credit and Banking, 2012, Volume 44, Number 8, Page 1667
[3]
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Oxford Bulletin of Economics and Statistics, 2013, Volume 75, Number 2, Page 157
[4]
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Journal of International Financial Markets, Institutions and Money, 2011, Volume 21, Number 4, Page 461

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