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Factor Analysis in a New-Keynesian Model

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Author Info
Beyer, Andreas
Farmer, Roger E A
Henry, Jérôme
Marcellino, Massimiliano

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

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Find related papers by JEL classification:
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
  2. 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. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
    Other versions:
  4. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2005. "Price setting behaviour in Spain: evidence from micro PPI data," Working Paper Series 522, European Central Bank. [Downloadable!]
    Other versions:
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