Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/206948 
Authors: 
Year of Publication: 
2019
Series/Report no.: 
DIW Discussion Papers No. 1831
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
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.
Subjects: 
dynamic factor models
external instruments
monetary policy
uncertainty shocks
JEL: 
C38
E60
Document Type: 
Working Paper

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