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What Lies Beneath? A Time-Varying FAVAR Model for the UK Transmission Mechanism

50 Pages Posted: 11 Apr 2011  

Haroon Mumtaz

University of London - School of Sciences

Pawel Zabczyk

CCBS, Bank of England

Colin Ellis

University of Birmingham

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2011

Abstract

This paper uses a time-varying Factor Augmented VAR to investigate the evolving transmission of monetary policy and demand shocks in the UK. Simultaneous estimation of time-varying impulse responses of a large set of macroeconomic variables and disaggregated prices suggest that the response of inflation, money supply and asset prices to monetary policy and demand shocks has changed over the sample period. In particular, during the post-1992 inflation targeting period, monetary policy shocks started having a bigger impact on prices, a smaller impact on activity and began contributing more to overall volatility. In contrast, demand shocks had the largest impact on these variables before the 1990s. We also document changes in the response of disaggregated prices, with the median reaction to contractionary policy shocks becoming more negative and the distribution more dispersed post-1992.

Keywords: Transmission mechanism, monetary policy, Factor Augmented VAR, timevarying coefficients, sign restrictions

JEL Classification: C38, E44, E52

Suggested Citation

Mumtaz, Haroon and Zabczyk, Pawel and Ellis, Colin, What Lies Beneath? A Time-Varying FAVAR Model for the UK Transmission Mechanism (March 18, 2011). ECB Working Paper No. 1320. Available at SSRN: https://ssrn.com/abstract=1789603

Haroon Mumtaz

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Pawel Zabczyk (Contact Author)

CCBS, Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Colin Ellis

University of Birmingham ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

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