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Factor Analysis in a New-Keynesian Model

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  • Beyer, Andreas
  • Farmer, Roger E A
  • Henry, Jérôme
  • Marcellino, Massimiliano

Abstract

New-Keynesian models are characterized by the presence of expectations as explanatory variables. To use these models for policy evaluation, the econometrician must estimate the parameters of expectation terms. Standard estimation methods have several drawbacks, including possible lack of identification of the parameters, misspecification of the model due to omitted variables or parameter instability, and the common use of inefficient estimation methods. Several authors have raised concerns over the validity of commonly used instruments to achieve identification. In this paper we analyse the practical relevance of these problems and we propose remedies to weak identification based on recent developments in factor analysis for information extraction from large data sets. Using these techniques, we evaluate the robustness of recent findings on the importance of forward looking components in the equations of the New-Keynesian model.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5266.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5266

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Keywords: determinacy of equilibrium; factor analysis; forward-looking output equation; New-Keynesian Phillips curve; rational expectations; Taylor rule;

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References

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Citations

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Cited by:
  1. George Kapetanios & Massimiliano Marcellino, 2008. "Cross-sectional Averaging and Instrumental Variable Estimation with Many Weak Instruments," Working Papers 627, Queen Mary, University of London, School of Economics and Finance.
  2. George Kapetanios & Massimiliano Marcellino, 2006. "Factor-GMM Estimation with Large Sets of Possibly Weak Instruments," Working Papers 577, Queen Mary, University of London, School of Economics and Finance.
  3. Andreas Beyer & Roger E.A. Farmer, 2005. "Measuring the Effects of Real and Monetary Shocks in a Structural New-Keynesian Model," Computing in Economics and Finance 2005 172, Society for Computational Economics.
  4. Andreas Beyer & Roger E. A. Farmer & Jérôme Henry & Massimiliano Marcellino, 2007. "Factor Analysis in a Model with Rational Expectations," NBER Working Papers 13404, National Bureau of Economic Research, Inc.
  5. Carriero, Andrea, 2008. "A simple test of the New Keynesian Phillips Curve," Economics Letters, Elsevier, vol. 100(2), pages 241-244, August.
  6. Jian Gao & Gang Gong & Xue-Zhong He, 2007. "Monetary Policy and Exchange Rate Regime: Proposal for a Small and Less Developed Economy," Research Paper Series 199, Quantitative Finance Research Centre, University of Technology, Sydney.

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