ECB paper aims to improve small-scale models for assessing policy shocks
Paper outlines a structural factor model
Small-scale vector autoregressive (VAR) models may struggle to capture the nuances of how people form expectations of the future, but better options are available, a working paper published on September 30 by the European Central Bank (ECB) finds.
Authors Lucia Alessi and Mark Kerssenfischer design a structural factor model (SFM) in the place of the VARs in their paper The response of asset prices to monetary policy shocks: stronger than thought. Their model implies data fits better with theory
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