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Level and volatility factors in macroeconomic data

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  • Gorodnichenko, Yuriy
  • Ng, Serena

Abstract

Macroeconomic models typically focus on innovations in the level of fundamentals as driver of business cycles because modeling of volatility can be demanding. This paper suggests a simple methodology that can separate the level from the volatility factors without directly estimating the volatility processes. This is made possible by exploiting features in the second order approximation of equilibrium models and using information in a large panel of data to estimate the factors. Augmenting the factors to a VAR shed light on the effects of the level and volatility shocks and their relative importance.

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  • Gorodnichenko, Yuriy & Ng, Serena, 2017. "Level and volatility factors in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 91(C), pages 52-68.
    • Handle: RePEc:eee:moneco:v:91:y:2017:i:c:p:52-68
    DOI: 10.1016/j.jmoneco.2017.09.004
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    More about this item

    Keywords

    Volatility; Business cycle fluctuations; Common factors; Robust principal components;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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