Effects of international shocks on Italian economy: FAVAR approach

The aim of this paper is to examine dynamic effects of international shocks on Italian economy. The usual approach taken is using small scale VAR models to examine these shocks, however these models don’t represent real economy because they are over simplified. Hence, in this paper is examined a large panel of data for 10 industrialized countries, represented with 300 variables in monthly frequency and the model deployed in order to explain these effects in more closely manner to real economy is a Bernanke, Boivin and Eliasz (2005) Factor augmented VAR (FAVAR) extended to the open economy by Mumtaz and Surico (2009) and identified with the sign restrictions. Results obtained using FAVAR model will provide more precise picture in respect to small scale VAR models.