Classical Time-Varying FAVAR Models - Estimation, Forecasting and Structural Analysis

68 Pages Posted: 8 Jun 2016

See all articles by Sandra Eickmeier

Sandra Eickmeier

Deutsche Bundesbank; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Wolfgang Lemke

European Central Bank

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: 2011

Abstract

We propose a classical approach to estimate factor-augmented vector autoregressive (FAVAR) models with time variation in the factor loadings, in the factor dynamics, and in the variance-covariance matrix of innovations. When the time-varying FAVAR is estimated using a large quarterly dataset of US variables from 1972 to 2007, the results indicate some changes in the factor dynamics, and more marked variation in the factors' shock volatility and their loading parameters. Forecasts from the time-varying FAVAR are more accurate than those from a constant parameter FAVAR for most variables and horizons when computed insample, for some variables in pseudo real time, mostly financial indicators. Finally, we use the time-varying FAVAR to assess how monetary transmission to the economy has changed. We find substantial time variation in the volatility of monetary policy shocks, and we observe that the reaction of GDP, the GDP deflator, inflation expectations and long-term interest rates to an equally-sized monetary policy shock has decreased since the early-1980s.

Keywords: FAVAR, time-varying parameters, monetary transmission, forecasting

JEL Classification: C3, C53, E52

Suggested Citation

Eickmeier, Sandra and Lemke, Wolfgang and Marcellino, Massimiliano, Classical Time-Varying FAVAR Models - Estimation, Forecasting and Structural Analysis (2011). Bundesbank Series 1 Discussion Paper No. 2011,04, Available at SSRN: https://ssrn.com/abstract=2785394 or http://dx.doi.org/10.2139/ssrn.2785394

Sandra Eickmeier (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
Frankfurt/Main D-60431
Germany

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Wolfgang Lemke

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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