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Opening the Black Box: Structural Factor Models with Large Cross-Sections

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

Abstract

This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We argue that all identification schemes employed in SVAR analysis can be easily adapted in dynamic factor models. Moreover, the “problem of fundamentalness”, which is intractable in structural VARs, can be solved, provided that the impulse-response functions are sufficiently heterogeneous. We provide consistent estimators for the impulse-response functions, as well as (n, T) rates of convergence. An exercise with US macroeconomic data shows that our solution of the fundamentalness problem may have important empirical consequences.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number 2008_036.

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Length: 40 p.
Date of creation: 2008
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Publication status: Published by:
Handle: RePEc:eca:wpaper:2008_036

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Keywords: Dynamic factor models; structural VARs; identification; fundamentalness;

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  1. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June.
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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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  25. Giannone, Domenico & Reichlin, Lucrezia & Sala, Luca, 2002. "Tracking Greenspan: Systematic and Unsystematic Monetary Policy Revisited," CEPR Discussion Papers 3550, C.E.P.R. Discussion Papers.
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