Econometrics & Applied Economics Seminar - Luis Uzeda (Bank of Canada)

Title: Endogenous Time-Variation in Vector Autoregressions

Abstract: This paper proposes a new econometric framework to provide robust inference on the origins of instabilities in the relationship between key macroeconomic variables. We introduce a new class of Time-Varying Parameter Vector Autoregression (TVP-VAR) models where the set of underlying structural shocks are allowed to potentially influence the dynamics of the autoregressive coefficients. The proposed Endogenous TVP-VAR framework is applied to study the sources of instabilities in the relationship between the unemployment, inflation and interest rates of the U.S. economy. The results indicate that cost-push shocks are an important source of macroeconomic instability and emphasize the role of lags in the transmission mechanism of monetary policy.