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Changes In The Transmission Of Monetary Policy: Evidence From A Time-Varying Factor-Augmented VAR

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Executive Summary

This paper re-examines the evolution of the US monetary transmission mechanism using an empirical framework that incorporates substantially more information than the standard tri-variate VAR model used in most previous studies. The formulation has two substantive advantages over earlier work: the additional information summarized by the common factors that are extracted from a large panel of aggregate and disaggregate variables improves the identification of the monetary policy shocks since the factors capture more accurately the amount of information analyzed by the monetary authority, they are able to estimate the time-varying effects of monetary policy surprises on macroeconomic aggregates and disaggregate prices and quantities of personal consumption expenditures.

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