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

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Listed:
  • 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.

Suggested Citation

  • Mario Forni & Domenico Giannone & Marco Lippi & Lucrezia Reichlin, 2008. "Opening the Black Box: Structural Factor Models with Large Cross-Sections," Working Papers ECARES 2008_036, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2008_036
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    More about this item

    Keywords

    Dynamic factor models; structural VARs; identification; fundamentalness;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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    This paper has been announced in the following NEP Reports:

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