Proxy VAR models in a data-rich environment

Martin Bruns

No 2019-03, University of East Anglia School of Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

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.

Keywords: Dynamic factor models; external instruments; monetary policy; uncertainty shocks (search for similar items in EconPapers)
JEL-codes: C38 E60 (search for similar items in EconPapers)
Date: 2019-08-16
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-ore
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Working Paper: Proxy VAR Models in a Data-Rich Environment (2019)
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