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Dynamic effects of credit shocks in a data-rich environment
We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. An identified credit shock resulting in an unanticipated increase in credit spreads causes a large and persistent downturn in indicators of real economic activity, labor market conditions, expectations of future economic conditions, a gradual decline in aggregate price indices, and a decrease in short- and longer-term riskless interest rates. Our identification procedure, which imposes restrictions on the response of a small number of economic ...
Working Paper
Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach
Structural vector autoregressions (VARs) are widely used to trace out the effect of monetary policy innovations on the economy. However, the sparse information sets typically used in these empirical models lead to at least two potential problems with the results. First, to the extent that central banks and the private sector have information not reflected in the VAR, the measurement of policy innovations is likely to be contaminated. A second problem is that impulse responses can be observed only for the included variables, which generally constitute only a small subset of the variables that ...
Journal Article
Assessing changes in the monetary transmission mechanism: a VAR approach
Paper for a conference sponsored by the Federal Reserve Bank of New York entitled Financial Innovation and Monetary Transmission
Working Paper
How has the monetary transmission mechanism evolved over time?
We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission - the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand - have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic-stochastic-general-equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as ...
Report
Has monetary policy become less powerful?
Recent vector autoregression (VAR) studies have shown that monetary policy shocks have had a reduced effect on the economy since the beginning of the 1980s. This paper investigates the causes of this change. First, we estimate an identified VAR over the pre- and post-1980 periods, and corroborate the existing results suggesting a stronger systematic response of monetary policy to the economy in the later period. Second, we present and estimate a fully specified model that replicates well the dynamic response of output, inflation, and the federal funds rate to monetary policy shocks in both ...