Identification of monetary policy shocks and its effects: FAVAR methodology for the Brazilian economy

Abstract

This paper applies the factor-augmented vector autoregressive methodology (FAVAR) to analyze the impacy of monetary policy shocks on the Brazilian economy, using 125 monthly series for the period between January of 1995 and September of 2009. Overall, the results obtained were consistent with economic theory and no price puzzle is observed. The paper also compared the FAVAR with the VAR methodologies, concluding that the results were very similar under both methodologies and that the gain of using the FAVAR methodology is very limited when Brazilian data is used to study the effects of monetary shocks.