Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach

By Ben S. Bernanke, Jean Boivin, Piotr Eliasz. 2003

350 citations recorded by the source corpus.

Structural vector autoregressions (VARs) are widely used to trace out the effect of monetary policy innovations on the economy. However, the sparse information sets typically used in these empirical models lead to at least two potential problems with the results. First, to the extent that central banks and the private sector have information not reflected in the VAR, the measurement of policy innovations is likely to be contaminated. A second problem is that impulse responses can be observed only for the included variables, which generally constitute only a small subset of the variables that the researcher and policymaker care about. In this paper we investigate one potential solution to this limited information problem, which combines the standard structural VAR analysis with recent developments in factor analysis for large data sets. We find that the information that our factor-augmented VAR (FAVAR) methodology exploits is indeed important to properly identify the monetary transmission mechanism. Overall, our results provide a comprehensive and coherent picture of the effect of monetary policy on the economy.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/42371fda17462ef1ce69ddabe42f923195d5762f

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Citations in the corpus

Does the Fed Respond to Oil Price Shocks (2011, neutral): “monetary policy has been demonstrated in Bernanke, Boivin and Eliasz (2005) and Banbura,”
Fitting observed inflation expectations (2011, positive): “4 Following the FAVAR methodology (Bernanke et al., 2005) there are some attempts to combine factor and DSGE models with the goal of incorporating as much of the available data as possible (Boivin and Giannoni, 2006; Giannone et al., 2008).”
Forecasting with Bayesian Vector Autoregression (2013, positive): “Bernanke et al. (2005) augments the factor structure by allowing the variables of interest to be directly related to the auxiliary variables xt = Λ f ft + Λ yt + ξt (107) instead of only indirectly through the factors ft.”
What Drives Oil Prices? Emerging versus Developed Economies (2012, positive): “More precisely, our full model is a FAVAR that builds on the general setup of Bernanke et al. (2005) and Boivin et al. (2009).”
Shocking language: understanding the macroeconomic effects of central bank communication (2016, positive): “We use a Factor-Augmented Vector Autoregression model (FAVAR), as developed by Bernanke, Boivin, and Eliasz (2005), in order to investigate the effects of the extra dimensions of the monetary policy announcements that we measure using the two timeseries indices.”
Economic Policy Uncertainty Spillovers in Booms and Busts (2019, positive): “…to the variance of the series belonging to the FRED-MD and add it as ﬁrst variable to our baseline vector. u This two-step procedure is meant to emulate the Factor-Augmented VAR (FAVAR) approach proposed by Bernanke, Boivin, and Eliasz (2005) for the identiﬁcation of a monetary policy shock.”
DSGE Models for Monetary Policy Analysis (2010, neutral): “See also Bernanke, Boivin, and Eliasz (2005).”
MONETARY POLICY UNCERTAINTY AND ECONOMIC FLUCTUATIONS: MONETARY POLICY UNCERTAINTY AND ECONOMIC FLUCTUATIONS (2017, neutral): “…variables are slow moving and do not react to contemporaneous monetary policy shocks; but monetary policy does respond to contemporaneous macroeconomic shocks; see, e.g. Christiano, Eichenbaum, and Evans(1999), Stock and Watson(2001), Bernanke, Boivin, and Eliasz(2005), and Wu and Xia(2015).”
On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint (2019, positive): “They embed their shadow rate in an identified FAVAR model similar to that in Bernanke et al. (2005), and find that (exogenous) changes in the shadow rate have an impact on the economy during the ZLB period similar to the Federal Funds rate in the preZLB period. A counterfactual simulation, in which ”
No News in Business Cycles (2014, neutral): “Closely related models have been studied by Forni and Reichlin (1998), Stock and Watson (2002a, 2002b, 2005), Bai and Ng (2002, 2007), Bai (2003) and Bernanke et al. (2005).”
Has Monetary Policy Become More Effective? (2006, neutral): “2 See the NBER working paper version (no. 5145, June 1995) of Bernanke and Mihov (1998), Gertler and Lown (2000), Barth and Ramey (2001), and Boivin and Giannoni (2002), among others.”