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Opening The Black Box: Structural Factor Models With Large Cross Sections

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  • Forni, Mario
  • Giannone, Domenico
  • Lippi, Marco
  • Reichlin, Lucrezia

Abstract

This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We establish sufficient conditions for identification of the structural shocks and the associated impulse-response functions. In particular, we argue that, if the data follow an approximate factor structure, the “problem of fundamentalness”, which is intractable in structural VARs, can be solved provided that the impulse responses are sufficiently heterogeneous. Finally, we propose a consistent method (and n,T rates of convergence) to estimate the impulse-response functions, as well as a bootstrapping procedure for statistical inference. JEL Classification: E0, C1.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 25 (2009)
Issue (Month): 05 (October)
Pages: 1319-1347

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Handle: RePEc:cup:etheor:v:25:y:2009:i:05:p:1319-1347_09

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References

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  1. Domenico Giannone & Lucrezia Reichlin, 2006. "Does information help recovering structural shocks from past observation?," ULB Institutional Repository 2013/6403, ULB -- Universite Libre de Bruxelles.
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    • Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224 National Bureau of Economic Research, Inc.
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