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

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Bayesian FAVARs with Agnostic Identification 43 say seven factors are required. My results are not supposed to give an conclusive answer to this discussion, rather they are supposed to give empirical evidence w.r.t. the impulse response analysis in favor of the one that provides more reasonable results. The specification used for the lags is 12, because the frequency of the data considered is monthly, however BBE report that even seven lags lead to similar results. Increasing the number of the factors had an impact in so far that the responses tended to be smoother and with a lower amplitude respectively. The qualitative results are fairly the same. Altogether the specification with seven factors produced the most reasonable results especially with respect to the prices. With this specification the reaction of the prices, in particular the commodity price index, had the most reasonable reaction. There is no prize puzzle prevalent. The restriction on the commodity price index appeared to be the one that had the least number of accepted draws with respect to the sign restriction. The most interesting results to me seem, however the importance of the identification scheme, as this approach combined with Gibbs sampling provides more accurate results than with the standard one applied by BBE. The critique by BBE that the parametric approach with a joint likelihood-based estimation might impose too much structure from which it suffers and therefore generates the inferior results compared to the nonpara- metric approach, cannot be approved. When applying the sign restriction approach in order to figure out the dynamic effects of a shock to monetary policy the results seem more reasonable and consistent with the conventional wisdom. In particular it is interesting that is delivers fairly tight error bands/confidence bands. The responses with the highest uncertainty are the output variables which is consistent with Uhlig [2005] and others who state that output does not have an unambiguous effect. It is fairly small.
44 Bayesian FAVARs with Agnostic Identification Figure 4: Here the impulse responses for 20 selected variables are presented for seven factors and the Block criteria 2 which has the following restrictions: The block criteria 1 sets the restriction consumer price index on nonborrowed reserves, M3 and the federal funds rate. The block criteria 2 sets the restrictions on consumer price index, nonborrowed reserves, M3, monetary base, and the federal funds rate. In order to get a better impression about the uncertainty of the impulse responses reported I provide mesh plots in figure 5-7. This is a possibility to visualize how certain one can be with median impulse responses. For that I collected all the accepted draws and sorted them in ascending order. Now one can directly see the uncertainty, not only for one specified percentile for error bands. The wider and flater the area in the center of the mesh the more certainty can be associated with mean response as most of the impulse resposes react alike akin to the same amplitude.
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