TY - UNPB

T1 - Proxy structural vector autoregressions, informational sufficiency and the role of monetary policy

AU - Miescu, Mirela

AU - Mumtaz, Haroon

PY - 2019/10/31

Y1 - 2019/10/31

N2 - We show that the contemporaneous and longer horizon impulse responses estimated using small-scale Proxy structural vector autoregressions (SVARs) can be severely biased in the presence of information insufficiency. Instead, we recommend the use of a Proxy Factor Augmented VAR (FAVAR) model that remains robust in the presence of this problem. In an empirical exercise, we demonstrate that this issue has important consequences for the estimated impact of monetary policy shocks in the US. We find that the impulse responses of real activity and prices estimated using a Proxy FAVAR are substantially larger and more persistent than those suggested by a small-scale Proxy SVAR.

AB - We show that the contemporaneous and longer horizon impulse responses estimated using small-scale Proxy structural vector autoregressions (SVARs) can be severely biased in the presence of information insufficiency. Instead, we recommend the use of a Proxy Factor Augmented VAR (FAVAR) model that remains robust in the presence of this problem. In an empirical exercise, we demonstrate that this issue has important consequences for the estimated impact of monetary policy shocks in the US. We find that the impulse responses of real activity and prices estimated using a Proxy FAVAR are substantially larger and more persistent than those suggested by a small-scale Proxy SVAR.

KW - information sufficiency

KW - dynamic factor models

KW - instrumental variables

KW - monetary policy

KW - structural VAR

M3 - Working paper

T3 - Economics Working Papers Series

BT - Proxy structural vector autoregressions, informational sufficiency and the role of monetary policy

PB - Lancaster University, Department of Economics

CY - Lancaster

ER -