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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Factor-Augmented VAR (FAVAR) model for Monetary Policy Analysis in Korea

Vol.20, No.3, September , 1–30


English Version |  Korean Version
  •   (Seoul National University)

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Abstract  

This study develops Factor-Augemented Vector Auto-Regression (FAVAR) Model to analyze monetary policy transmission mechanism in Korea for the period from 1990s, in which inflation targeting is adopted and the short-term interest rate is used as the main policy instrument. Some drawbacks of simple VAR models are discussed first, and then FAVAR model is developed to overcome the drawbacks. Monetary policy transmission mechanism can be inferred more efficiently and consistently by using FAVAR model since FAVAR model allows to use information from a large number of variables and to analyze the responses of a large number of variables simultaneously.


Keywords
   Monetary Policy Transmission Mechanism, Structural VAR, Monetary Policy Shocks

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