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The Generalized Dynamic-Factor Model: Identification And Estimation

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  • Mario Forni
  • Marc Hallin
  • Marco Lippi
  • Lucrezia Reichlin

Abstract

This paper proposes a factor model with infinite dynamics and nonorthogonal idiosyncratic components. The model, which we call the generalized dynamic-factor model, is novel to the literature and generalizes the static approximate factor model of Chamberlain and Rothschild (1983), as well as the exact factor model à la Sargent and Sims (1977). We provide identification conditions, propose an estimator of the common components, prove convergence as both time and cross-sectional size go to infinity at appropriate rates, and present simulation results. We use our model to construct a coincident index for the European Union. Such index is defined as the common component of real GDP within a model including several macroeconomic variables for each European country. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 82 (2000)
Issue (Month): 4 (November)
Pages: 540-554

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Handle: RePEc:tpr:restat:v:82:y:2000:i:4:p:540-554

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  1. Forni, Mario & Reichlin, Lucrezia, 1996. "Dynamic Common Factors in Large Cross-Sections," Empirical Economics, Springer, Springer, vol. 21(1), pages 27-42.
  2. Mario Forni & Lucrezia Reichlin, 1998. "Let's get real: a factor analytical approach to disaggregated business cycle dynamics," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/10147, ULB -- Universite Libre de Bruxelles.
  3. Forni, Mario & Reichlin, Lucrezia, 1997. "National Policies and Local Economies: Europe and the United States," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1632, C.E.P.R. Discussion Papers.
  4. Stock, J.H. & Watson, M.W., 1989. "New Indexes Of Coincident And Leading Economic Indicators," Papers, Harvard - J.F. Kennedy School of Government 178d, Harvard - J.F. Kennedy School of Government.
  5. Forni, Mario & Lippi, Marco, 2000. "The Generalized Dynamic Factor Model: Representation Theory," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2509, C.E.P.R. Discussion Papers.
  6. Chamberlain, Gary, 1983. "Funds, Factors, and Diversification in Arbitrage Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 51(5), pages 1305-23, September.
  7. Forni, Mario & Lippi, Marco, 1997. "Aggregation and the Microfoundations of Dynamic Macroeconomics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198288008, October.
  8. Arthur F. Burns & Wesley C. Mitchell, 1946. "Measuring Business Cycles," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number burn46-1.
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