The Dynamic Effects of Monetary Policy: A Structural Factor Model Approach

38 Pages Posted: 17 Feb 2009

See all articles by Mario Forni

Mario Forni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Centre for Economic Policy Research (CEPR)

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB)

Date Written: December 2008

Abstract

We use the structural factor model proposed by Forni, Giannone, Lippi and Reichlin (2007) to study the effects of monetary policy. The advantage with respect to the traditional vector autoregression model is that we can exploit information from a large data set, made up of 112 US monthly macroeconomic series. Monetary policy shocks are identified using a standard recursive scheme, in which the impact effects on both industrial production and prices are zero. Such a scheme, when applied to a VAR including a suitable selection of our variables, produces puzzling results. Our main findings are the following. (i) The maximal effect on bilateral real exchange rates is observed on impact, so that the "delayed overshooting" or "forward discount" puzzle disappears. (ii) After a contractionary shock prices fall at all horizons, so that the price puzzle is not there. (iii) Monetary policy has a sizable effect on both real and nominal variables. Such results suggest that the structural factor model is a promising tool for applied macroeconomics.

Keywords: Delayed Overshooting Puzzle, Monetary Policy, Price Puzzle, Structural Factor Model

JEL Classification: C32, E32, E52, F31

Suggested Citation

Forni, Mario and Gambetti, Luca, The Dynamic Effects of Monetary Policy: A Structural Factor Model Approach (December 2008). CEPR Discussion Paper No. DP7098, Available at SSRN: https://ssrn.com/abstract=1344677

Mario Forni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy
+39 059 205 6852 (Phone)
+39 059 205 6947 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

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