The Impact of External Shocks on Emerging Countries, The Case of Romania MSc Student: POPA...
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Transcript of The Impact of External Shocks on Emerging Countries, The Case of Romania MSc Student: POPA...
The Impact of External Shocks
on Emerging Countries The Case of Romania
MSc Student POPA LACRAMIOARASUPERVISORProfessor MOISA ALTAR
Topics
Motivation
Objectives
Literature review FAVAR approach
The asymmetry of external shocks(TVAR) Conclusions
bullBecause of the perspective of the integration in the European and Monetary Union it is important to establish a correct assessment of the impact of the euro area shocks on the Romanian economy
bullMoreover the financial crisis reflect the fact that the monetary authority should take into account the external disturbances when designing the monetary policy because even if Romania had important gains in which concern the reduction in inflation reduction of budget deficit and unemployment it is still small open economy vulnerable to external disturbances originating from more developed countries
Motivation
Objectives
This paper has to major purposes to establish if the external originating from the
euro area are transmitted to the Romanian economy and their magnitude
I have considered three kind of shocks monetary policy shocks demand shocks and supply shocks
finding possible asymmetric effects of a negative and a positive shock
bullThe study of the open economies started with the work of Mundell(19621963)Dornbusch(1976) Obsfeld anf Rogoff(1995)
bullCanova (2005) uses a Vector autoregressive model identified using sign restrictions to study the effects of US shocks on several countries from the Latin America
bullPersman and Smets (2001) effects of an unexpected change in monetary policy in the euro area using an identified VAR model alternative identification scheme
bullDawit Senbet(2008) uses a Factor augmented VAR model on a wide range of macroeconomic indicators for several industrialized countries He findes that model with factors eliminates the ldquoprice puzzlerdquo response evident in the standard VAR models for all countries
Literature review
Econometric methodology -FAVAR The model consists of two blocks one for the
Romanian economy which is named ldquodomesticrdquo and one for the Euro area which is named lsquoforeignrsquo
Let Yt be an M times1 vector of observable economic variables from the foreign block assumed to affect the dynamics of the variables from the Romanian economy
Additional economic information not fully captured by the Yt may be relevant to modeling the dynamics of these series Suppose that this additional information can be summarized by an K times1 vector of unobserved factors Ft where K is ldquosmallrdquo
tt
t
t
t
Y
FL
Y
F
1
1)(
tt
yt
ft eYFX
f
y
tte
-NxK-matrix of factor loadings
-NxM-matrix of factor loadings
-vector of error terms
t
t
Y
F -Kx1-vector of unobserved factors-Mx1-vector ofobservable factors
ν~N(0 Q) e ~ N(0 R)
tX -Nx1-informational time series
Econometric methodology -FAVAR
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Topics
Motivation
Objectives
Literature review FAVAR approach
The asymmetry of external shocks(TVAR) Conclusions
bullBecause of the perspective of the integration in the European and Monetary Union it is important to establish a correct assessment of the impact of the euro area shocks on the Romanian economy
bullMoreover the financial crisis reflect the fact that the monetary authority should take into account the external disturbances when designing the monetary policy because even if Romania had important gains in which concern the reduction in inflation reduction of budget deficit and unemployment it is still small open economy vulnerable to external disturbances originating from more developed countries
Motivation
Objectives
This paper has to major purposes to establish if the external originating from the
euro area are transmitted to the Romanian economy and their magnitude
I have considered three kind of shocks monetary policy shocks demand shocks and supply shocks
finding possible asymmetric effects of a negative and a positive shock
bullThe study of the open economies started with the work of Mundell(19621963)Dornbusch(1976) Obsfeld anf Rogoff(1995)
bullCanova (2005) uses a Vector autoregressive model identified using sign restrictions to study the effects of US shocks on several countries from the Latin America
bullPersman and Smets (2001) effects of an unexpected change in monetary policy in the euro area using an identified VAR model alternative identification scheme
bullDawit Senbet(2008) uses a Factor augmented VAR model on a wide range of macroeconomic indicators for several industrialized countries He findes that model with factors eliminates the ldquoprice puzzlerdquo response evident in the standard VAR models for all countries
Literature review
Econometric methodology -FAVAR The model consists of two blocks one for the
Romanian economy which is named ldquodomesticrdquo and one for the Euro area which is named lsquoforeignrsquo
Let Yt be an M times1 vector of observable economic variables from the foreign block assumed to affect the dynamics of the variables from the Romanian economy
Additional economic information not fully captured by the Yt may be relevant to modeling the dynamics of these series Suppose that this additional information can be summarized by an K times1 vector of unobserved factors Ft where K is ldquosmallrdquo
tt
t
t
t
Y
FL
Y
F
1
1)(
tt
yt
ft eYFX
f
y
tte
-NxK-matrix of factor loadings
-NxM-matrix of factor loadings
-vector of error terms
t
t
Y
F -Kx1-vector of unobserved factors-Mx1-vector ofobservable factors
ν~N(0 Q) e ~ N(0 R)
tX -Nx1-informational time series
Econometric methodology -FAVAR
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
bullBecause of the perspective of the integration in the European and Monetary Union it is important to establish a correct assessment of the impact of the euro area shocks on the Romanian economy
bullMoreover the financial crisis reflect the fact that the monetary authority should take into account the external disturbances when designing the monetary policy because even if Romania had important gains in which concern the reduction in inflation reduction of budget deficit and unemployment it is still small open economy vulnerable to external disturbances originating from more developed countries
Motivation
Objectives
This paper has to major purposes to establish if the external originating from the
euro area are transmitted to the Romanian economy and their magnitude
I have considered three kind of shocks monetary policy shocks demand shocks and supply shocks
finding possible asymmetric effects of a negative and a positive shock
bullThe study of the open economies started with the work of Mundell(19621963)Dornbusch(1976) Obsfeld anf Rogoff(1995)
bullCanova (2005) uses a Vector autoregressive model identified using sign restrictions to study the effects of US shocks on several countries from the Latin America
bullPersman and Smets (2001) effects of an unexpected change in monetary policy in the euro area using an identified VAR model alternative identification scheme
bullDawit Senbet(2008) uses a Factor augmented VAR model on a wide range of macroeconomic indicators for several industrialized countries He findes that model with factors eliminates the ldquoprice puzzlerdquo response evident in the standard VAR models for all countries
Literature review
Econometric methodology -FAVAR The model consists of two blocks one for the
Romanian economy which is named ldquodomesticrdquo and one for the Euro area which is named lsquoforeignrsquo
Let Yt be an M times1 vector of observable economic variables from the foreign block assumed to affect the dynamics of the variables from the Romanian economy
Additional economic information not fully captured by the Yt may be relevant to modeling the dynamics of these series Suppose that this additional information can be summarized by an K times1 vector of unobserved factors Ft where K is ldquosmallrdquo
tt
t
t
t
Y
FL
Y
F
1
1)(
tt
yt
ft eYFX
f
y
tte
-NxK-matrix of factor loadings
-NxM-matrix of factor loadings
-vector of error terms
t
t
Y
F -Kx1-vector of unobserved factors-Mx1-vector ofobservable factors
ν~N(0 Q) e ~ N(0 R)
tX -Nx1-informational time series
Econometric methodology -FAVAR
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Objectives
This paper has to major purposes to establish if the external originating from the
euro area are transmitted to the Romanian economy and their magnitude
I have considered three kind of shocks monetary policy shocks demand shocks and supply shocks
finding possible asymmetric effects of a negative and a positive shock
bullThe study of the open economies started with the work of Mundell(19621963)Dornbusch(1976) Obsfeld anf Rogoff(1995)
bullCanova (2005) uses a Vector autoregressive model identified using sign restrictions to study the effects of US shocks on several countries from the Latin America
bullPersman and Smets (2001) effects of an unexpected change in monetary policy in the euro area using an identified VAR model alternative identification scheme
bullDawit Senbet(2008) uses a Factor augmented VAR model on a wide range of macroeconomic indicators for several industrialized countries He findes that model with factors eliminates the ldquoprice puzzlerdquo response evident in the standard VAR models for all countries
Literature review
Econometric methodology -FAVAR The model consists of two blocks one for the
Romanian economy which is named ldquodomesticrdquo and one for the Euro area which is named lsquoforeignrsquo
Let Yt be an M times1 vector of observable economic variables from the foreign block assumed to affect the dynamics of the variables from the Romanian economy
Additional economic information not fully captured by the Yt may be relevant to modeling the dynamics of these series Suppose that this additional information can be summarized by an K times1 vector of unobserved factors Ft where K is ldquosmallrdquo
tt
t
t
t
Y
FL
Y
F
1
1)(
tt
yt
ft eYFX
f
y
tte
-NxK-matrix of factor loadings
-NxM-matrix of factor loadings
-vector of error terms
t
t
Y
F -Kx1-vector of unobserved factors-Mx1-vector ofobservable factors
ν~N(0 Q) e ~ N(0 R)
tX -Nx1-informational time series
Econometric methodology -FAVAR
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
bullThe study of the open economies started with the work of Mundell(19621963)Dornbusch(1976) Obsfeld anf Rogoff(1995)
bullCanova (2005) uses a Vector autoregressive model identified using sign restrictions to study the effects of US shocks on several countries from the Latin America
bullPersman and Smets (2001) effects of an unexpected change in monetary policy in the euro area using an identified VAR model alternative identification scheme
bullDawit Senbet(2008) uses a Factor augmented VAR model on a wide range of macroeconomic indicators for several industrialized countries He findes that model with factors eliminates the ldquoprice puzzlerdquo response evident in the standard VAR models for all countries
Literature review
Econometric methodology -FAVAR The model consists of two blocks one for the
Romanian economy which is named ldquodomesticrdquo and one for the Euro area which is named lsquoforeignrsquo
Let Yt be an M times1 vector of observable economic variables from the foreign block assumed to affect the dynamics of the variables from the Romanian economy
Additional economic information not fully captured by the Yt may be relevant to modeling the dynamics of these series Suppose that this additional information can be summarized by an K times1 vector of unobserved factors Ft where K is ldquosmallrdquo
tt
t
t
t
Y
FL
Y
F
1
1)(
tt
yt
ft eYFX
f
y
tte
-NxK-matrix of factor loadings
-NxM-matrix of factor loadings
-vector of error terms
t
t
Y
F -Kx1-vector of unobserved factors-Mx1-vector ofobservable factors
ν~N(0 Q) e ~ N(0 R)
tX -Nx1-informational time series
Econometric methodology -FAVAR
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Econometric methodology -FAVAR The model consists of two blocks one for the
Romanian economy which is named ldquodomesticrdquo and one for the Euro area which is named lsquoforeignrsquo
Let Yt be an M times1 vector of observable economic variables from the foreign block assumed to affect the dynamics of the variables from the Romanian economy
Additional economic information not fully captured by the Yt may be relevant to modeling the dynamics of these series Suppose that this additional information can be summarized by an K times1 vector of unobserved factors Ft where K is ldquosmallrdquo
tt
t
t
t
Y
FL
Y
F
1
1)(
tt
yt
ft eYFX
f
y
tte
-NxK-matrix of factor loadings
-NxM-matrix of factor loadings
-vector of error terms
t
t
Y
F -Kx1-vector of unobserved factors-Mx1-vector ofobservable factors
ν~N(0 Q) e ~ N(0 R)
tX -Nx1-informational time series
Econometric methodology -FAVAR
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
tt
t
t
t
Y
FL
Y
F
1
1)(
tt
yt
ft eYFX
f
y
tte
-NxK-matrix of factor loadings
-NxM-matrix of factor loadings
-vector of error terms
t
t
Y
F -Kx1-vector of unobserved factors-Mx1-vector ofobservable factors
ν~N(0 Q) e ~ N(0 R)
tX -Nx1-informational time series
Econometric methodology -FAVAR
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
tt
t
t
t
t
t
tyf
t
t
Y
FL
Y
F
e
Y
F
Y
X
1
1)(
000
))(( QLRyf
21Transform the model into the following state-space form
Define )( ttt YXX
)cov( tteeR
)0( tt ee )( ttt YFF
-measurement equation
-transition equation
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
ttt eFX
ttt FLF 1)(
)(~
21 TT XXXX )(~
21 TT FFFF
dFpFp TT )~
()~
(TT FdFpp
~)
~()(
-where Λ is the loading matrix from the measurement equation
)~
( TFp -joint posterior density
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
)~
~
( 1TT FXp
)~~
( 0TT XFp
22 The Gibbs sampling methodology
1 First choose a set of starting values for the parameters θ say 0
2 Second conditional on and the data draw a set of values for from the conditional density
0 TX~
TF~
Say-1~TF
3 Third conditional on the sampled values of TF~
and the data draw a set of values of theparameters θ
-it implies following three steps
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
1
11 )
~()
~()
~~(
T
ttttTTTT XFFpXFpXFp
1 Choice of 0
I used the principal components method
2 Drawing from the conditional distribution )~~
( TT XFp
bullIt can be expressed as the product of conditional distributions of factors at each date t as follows
bullI use Kalman filter to estimate the unobservable factors
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
3 Drawing from the conditional distribution )~
~
( 1TT FXp
ttt eFX ttt FLF 1)(
1Rgression equation
ttt eFX
Bayes theorem
))ˆ()ˆ((2
exp[
2
)ˆ()ˆ(
)(ˆ
2
2
1
11
FFSSEhh
L
FXFXSSE
XFFF
tN
N
tt
)]()(2
exp[
2
)(
2
2
FXFXhh
hL N
N
Define1h
)()()( hLhPXhp
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
]2
exp[)(2
2
2 shhRii
)()(2
1exp(
)()(2
1exp(2)(
12
122
Rh
Rhp
k
kK
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
2 VAR model ttt FLF 1)(
The Minnesota Prior ndash conditions They are based on an approximation which leads to great simplifcations in prior elicitation and computationThe original Minnesota prior simplifies even further by assuming Σ to be a diagonal matrix-each equation of the VAR can be estimated one at a time and we canset i (where is the standard OLS estimate of the error variance in the ith equation and is the iith element of )
For the prior mean of Min the Minnesota prior involves setting most or all of its elements to zero except for the elements corresponding to the first own lag of the dependent variable in each equation these elements are set to one
2iii s 2
isii
)(L
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
-constructing diagonal elements of
so that the prior variance of parameter on k lagged jth variable in ith equation equals
22 ji k
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Data description
The analysis is based on monthly data covering the period 2000M01-2010M02 The sources of data are Eurostat The National Bank of Romania and National Institute of Statistics
For each of the two blocks I collected data on real activity inflation money and interest rates
For real activity I considered data on output growth employment imports and exports
Inflation is measured including the consumer price index on different category of goods (alimentary nonalimentary) services
interest rates include ROBOR on different maturities 3M EURIBOR and monetary policy interest rate
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Data description
The data were seasonally adjusted using European Union program Demetra and were normalized considering 2005=100
Because the number of variables used in the model is very high I included their description in the Appendix A of the paper where are also specified the results of the unit root tests
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04hicpEUR
0 100-005
0
005
01
015euribor
0 100-01
0
01
02
03
04CSEUR
0 100-005
0
005
01
015
02IPC
0 100-01
0
01
02
03IPCMN
0 100-005
0
005
01
015
02IPCMA
0 100-01
0
01
02
03IPCSERV
0 100-05
0
05
1
15ROBOR 3M
0 100-005
0
005crEUR
0 100-05
0
05
1crRON
0 100-05
0
05
1
15ROBOR6M
0 100-06
-04
-02
0
02PI
FAVAR ndash Estimation Results
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Impulse response to a foreign monetary policy shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Impulse response to a foreign supply shock
0 100-001
0
001
002
003
004
prodindEU
0 100-01
0
01
02
03
04hicpEUR
0 100-002
0
002
004
006euribor
0 100-002
0
002
004
006CSEUR
0 100-002
0
002
004
006IPC
0 100-002
0
002
004
006IPCMN
0 100-001
0
001
002
003
004IPCMA
0 100-002
0
002
004
006IPCSERV
0 100-1
0
1
2
3ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-1
0
1
2
3ROBOR6M
0 100-005
0
005
01
015PI
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Impulse response to a foreign supply shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01
015PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
0
002
004
006
008UNEMPL
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
0 100-008
-006
-004
-002
0
002
unemplEU
0 100-02
0
02
04
06hicpEUR
0 100-002
0
002
004
006euribor
0 100-004
-002
0
002
004
006CSEUR
0 100-004
-002
0
002
004
006IPC
0 100-004
-002
0
002
004
006IPCMN
0 100-004
-002
0
002
004IPCMA
0 100-004
-002
0
002
004
006IPCSERV
0 100-02
-01
0
01
02ROBOR 3M
0 100-02
0
02
04
06crRON
0 100-02
-01
0
01
02
03ROBOR6M
0 100-01
-005
0
005
01PI
Impulse response to a foreign demand shock
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
0 100-01
0
01
02
03
04exp
0 100-01
-005
0
005
01PPIFI
0 100-005
0
005
01
015PPIUC
0 100-005
0
005
01
015
02PPI
0 100-002
-001
0
001
002UNEMPL
Impulse response to a foreign demand shock
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
2The asymmetry of external shocks(TVAR)
tt
ttt yL
yL
A
A
m
my
2
1
2
1
2
1
)(
)(
A general TAR model that permits the existence of two regimes and more than one lag may be written as
if cqt
if cqt
))(1)()(()())(( 21221111 cqIyLAmcqIyLAmy tttttt -where I() is an indicator function which takes the value of 1 if the logical statement is satisfied and 0 otherwise
Variables HICPEURRON exchange rate the consumer price index 3M ROBOR volume of loans in national currency volume of loans in devises the index of industrial production
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
TVAR-Empirical resultsAsymmetric effects of monetary policy shocks
-4
-2
0
2
4
6
8
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
-20
-10
0
10
20
30
40
50
60
70
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
-400
-300
-200
-100
0
100
200
300
400
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
bullThe reduction inflation in the euro area can be explained by a reduction in the real activity bullTo stimulate the economy the Central Bank reduces the monetary policy interest rate and the demand for the national currency will increases determinating an appreciation of the national currency bullThe difference between the response of the exchange rate to a positive shock and a negative shock can be explained by the opportunistic behavior of importers who try to take advantage of the decrease in European prices causing the appreciation of the national currencybullThe difference in response in consumer prices can be explained by the behavior of producers who try to maintain their market share while in the case of depreciation firms absorb a part of the inflationary impactbullThe response of the industrial production to european monetary policy shock is much bigger in the case of negative shock An explenation for this may be the fact that usually negative shocks have bigger effects on emerging markets because of their dependencies on exports in covering the current account deficits
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
TVAR(positive and negative monetary policy shocks- Probabilities of the two regimes 1050395
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5TVAR 2000 (3) - 2010 (1)
L_HICP_EU DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10 Probabilities of Regime 2
-it presents the periods in which each of the two regimes occurred Both regimes includes periods of small changes in HICP
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
-25
-20
-15
-10
-5
0
5
10
15
20
1 11 21 31 41 51
IFR_CS_EURS1 IFR_CS_EURS2
TVAR-Empirical resultsAsymmetric effects of demand shocks
0
50
100
150
200
250
300
350
1 11 21 31 41 51
IFR_CPI S1 IFR_CPI S2
-40
-30
-20
-10
0
10
20
1 11 21 31 41 51
IFR_PI S1 IFR_PI S2
bullAn increase in unemployment rate causes a reduction in the real activity of the euro areaso the Central Bank will adopt an expansionary monetary policy reducing the interest rates bullAn increase of the unemployment rate determines a reduction in the real activity from the euro area The EURORON exchange rate increases and this can be explained by the reduction of demand for currencies of the emerging countriesinvestors preferring to buy safer currenciesbullThe second regime reflects that a reduction in the unemployment rate determines a decrease of the exchange rate This may happen because of an increase in real activity leading to an Increse imports which results in the increase of exports for the national economy
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
TVAR(positive and negative demand shocks- Probabilities of the two regimes
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-10
-5
0
5
TVAR 2000 (3) - 2010 (1)DL_UNEMPL_EUR DL_CPI DL_CRNGR DL_PI
DLCS_EUR DROBOR3M DL_CRNGV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
05
10Probabilities of Regime 2
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Conclusions I showed that external innovations play an important role
for the evolution of macro-economy variables External shocks propagate quickly to our economy and
their effects are felt for a long period of time more than one year
Comparing the three shocks we see that the effect of the demand shocks is lower then that of the monetary policy shocks and is transmitted in the economy for a shorter period of time
An explanation for this may be the fact that financial variables react more quickly to an innovation then the variables referring to real activity for example
Asymmetric effects manifests for all the shocks considered
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Bernanke Ben and Jean Boivin (April 2003) ldquoMonetary Policy in a Data-Rich Environmentrdquo Journalof Monetary Economics 503 525-546
Bernanke B S J Boivin and P Eliasz rdquo(versions 200320042005) ldquoMeasuring the effects of monetary policy A factor-augmented vector autoregressive (FAVAR) approach Quarterly Journal of Economics 120 387-422
Brooks Chris (2002) ldquoIntroductory econometrics for finance ldquoCambridge University Press ch 9 Boivin JSerena Ng (2003)ldquoAre more Data Always Better for Factor Analysisrdquo NBER Working
Paper 9829 Belviso F Milani F(2003)ldquoStructural Factor-Augmented VAR(SFAVAR)rdquo Princeton University Blaes B(2009)ldquoMoney and monetary policy transmission in the euro areaevidence from FAVAR
and VAR approachesrdquoDeutsche Bundesbank Research Centre Discussion PaperSeries 1 Economic Studies No 18
Canova Fabio(2005) ldquo The Transmission of US Shocks to Latin Americardquo Jurnal of applied econometrics 20 229ndash251
Christiano Laurence Martin Eichenbaum and Charles Evans(2000) ldquoMonetary Policy ShocksWhat Have We Learned and to What Endrdquo in J Taylor and MWoodford edsHandbook of Macroeconomics Amsterdam North-Holland
Debortoli DNunes R(2008) ldquoThe macroeconomic efects of external pressures on monetary policyrdquo International Finance Discussion Papers No244
George Casella Edward I George( Aug 1992) ldquoExplaining the Gibbs Samplerrdquo The American Statistician Vol 46 No 3 pp 167-174
Gelfand Alan E Adrian F M Smith ldquoSampling-Based Approaches to Calculating Marginal Densitiesrdquo Jun 1990 Journal of the American Statistical Association Vol 85 No 410 pp 398-409
Hansen Bruce E(1996) ldquoInference in TAR Modelsrdquo Boston College Economics Department Hamilton JD(1994) rdquoTime Series Analysis ldquoPrinceton University Press ch13
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Kim Chang-Jin and Charles R Nelson1999 State-Space Models with Regime SwitchingCambridge MA MIT Press
Korobilis Dimitris ldquo Assessing the Transmission of Monetary Policy Shocks Using Dynamic Factor Models Department of Economics University of Strathclyde The Rimini Center for Economic Analysis
Koop G 2003 rdquo Bayesian Econometricsrdquo Wiley Chichester ch10 Mumtaz Haroon Paolo Surico2007 ldquoThe Transmission of International ShocksA Factor
Augmented VAR Approachrdquo Bank of England Martin Eichenbaum Charles L Evans1995 ldquoSome empirical evidence on the effects of
shocks to monetary policy of the exchange ratesrdquo Quarterly Journal of Economics No110 McCoy D McMahon M ldquoDifferences in The transmission of Monetary Policy in the Euro-
Areaan empirical approachrdquo 2000Central Bank amp Financial Services Authority of Ireland (CBFSAI) in its series Research Technical Papers No5RT00
Obstfeld Maurice ldquoInternational MacroeconomicsBeyond the Mundell-Fleming Modelrdquo July 2001 Department of Economics University of California Berkeley
Peersman GSmets F ldquoThe Monetary transmission Mechanism in the Euro areamore evidence from VAR analysisrdquo 2001European central bank WP No 91
Peek J and Eric S Rosengren ldquoThe International Transmission of Financial ShocksThe Case of Japanrdquo1996 Federal Reserve Bank of Boston Working Paper No 96-1
Ramaswamy RSloek TldquoThe real effects of monetary policy in The European UnionWhat are the differencesrdquo1997IMF Research Department WP No 160
Raftery Adrian ELewis SldquoHow Many Iterations in The Gibbs Samplerrdquo1991University of Washington
Senbet D ldquoMeasuring the Impact and International Transmission of Monetary Policy A Factor-Augmented VectorAutoregressive (FAVAR) Approachrdquo2008 European Journal of Economics Finance and Administrative Sciences Issue 13
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
RPf
FXXX
QLPLP
FLF
tttttt
ttttttttt
tttt
tttt
11
111
111
111
)()(
)(
Kalman filter for
Prediction
Updating
11
11
tttttttt
ttttttt
PKPP
KFF
11
1
tttttt fPK is the Kalman gain
)~
( TT XFp ttt eFX
ttt FLF 1)(
Thank You
Thank You