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Changes in monetary policy and shifts in dynamics of the macro economy are typically described using empirical models that only include a limited amount of information. Examples of such models include time-varying vector auto regressions that are estimated using output growth, inflation and a short-term interest rate. This paper extends these models by incorporating a larger amount of information in these tri-variate VARs. In particular, the authors use a factor augmented vector auto regression extended to incorporate time-varying coefficients and stochastic volatility in the innovation variances.
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