Proxy VAR Models in a Data-Rich Environment

45 Pages Posted: 27 Nov 2019

See all articles by Martin Bruns

Martin Bruns

University of East Anglia (UEA)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2019


Structural VAR models require two ingredients: (i) Informational sufficiency, and (ii) a valid identification strategy. These conditions are unlikely to be met by small-scale recursively identified VAR models. I propose a Bayesian Proxy Factor-Augmented VAR (BP-FAVAR) to combine a large information set with an identification scheme based on an external instrument. In an application to monetary policy shocks I find that augmenting a standard small-scale Proxy VAR by factors from a large set of financial variables changes the model dynamics and delivers price responses which are more in line with economic theory. A second application shows that an exogenous increase in uncertainty affects disaggregated investment series more negatively than consumption series.

Keywords: dynamic factor models, external instruments, monetary policy, uncertainty shocks

JEL Classification: C38, E60

Suggested Citation

Bruns, Martin, Proxy VAR Models in a Data-Rich Environment (November 2019). DIW Berlin Discussion Paper No. 1831, Available at SSRN: or

Martin Bruns (Contact Author)

University of East Anglia (UEA) ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics