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