Measuring the Effects of a Shock to Monetary Policy - Humboldt ...

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Bayesian FAVARs with Agnostic Identification 41 Figure 2: Here the convergence is checked for the 5 factors specification. Each of the factors have converged as the second half of the median of the factors generated does not deviate from the first half. This can be considered as an indication that the empirical distribution has approximated the marginal distribution of the factors sufficiently accurate.
42 Bayesian FAVARs with Agnostic Identification Figure 3: Here the convergence is checked for the 7 factors specification. Each of the factors have converged as the second half of the median of the factors generated does not deviate from the first half. This can be considered as an indication that the empirical distribution has approximated the marginal distribution of the factors sufficiently accurate. On the whole I present results for factor specification of two, five and seven factors, in order to check on the one hand the impact of the number of the chosen factors for the reaction of the economy, visualized with the impulse response analysis. On the other hand I give an comment on the discussion how many factors are relevant and sufficient to capture the dynamics of the US economy. Gianone, Reichlin, and Sala [2004] find evidence that the US comovements and the dynamics of the US economy can be described by two factors whereas Stock and Watson [2005] provide evidence that more, that is to
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