Measuring Monetary Policy - A Theoretical Foundation and an Application of the Factor Augmented Vector Autoregressive Approach
This essay uses the Factor Augmented Vector Autoregressive (FAVAR) approach to quantify the effects of monetary policy. Traditional methods to estimate the effects of monetary policy, such as Vector Autoregressive (VAR) models, have yielded unsatisfactory results, mainly due to sparse information sets included in the models. Augmenting the VAR model with factors summarizing the information of a va