Exploring Monetary Policy Shocks with Large-Scale Bayesian VARs

Abstract

I introduce a high-dimensional Bayesian vector autoregressive (BVAR) framework designed to estimate the effects of conventional monetary policy shocks. The model captures structural shocks as latent factors, enabling computationally efficient estimation in high-dimensional settings through a straightforward Gibbs sampler. By incorporating time variation in the effects of monetary policy while maintaining tractability, the methodology offers a flexible and scalable approach to empirical macroeconomic analysis using BVARs, well-suited to handle data irregularities observed in recent times. Applied to the U.S. economy, I identify monetary shocks using a combination of high-frequency surprises and sign restrictions, yielding results that are robust across a wide range of specification choices. The findings indicate that the Federal Reserve's influence on disaggregated consumer prices fluctuated significantly during the 2022-24 high-inflation period, shedding new light on the evolving dynamics of monetary policy transmission.

Keywords: Disaggregated consumer prices, Latent factors, High-dimensional Bayesian VAR, Time-varying parameters, Sign restrictions, High frequency data JEL Classification: C11, C32, C55, E31, E52, E58, E66