Proxy VAR Models in a Data-Rich Environment
45 Pages Posted: 27 Nov 2019
There are 2 versions of this paper
Proxy VAR Models in a Data-Rich Environment
Date Written: November 2019
Abstract
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: Suggested Citation