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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 analyze 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. JEL Classification: E5, E52, E58

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0510.

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Date of creation: Aug 2005
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Handle: RePEc:ecb:ecbwps:20050510

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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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Citations

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Cited by:
  1. 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.
  2. Kapetanios, George & Marcellino, Massimiliano, 2010. "Factor-GMM estimation with large sets of possibly weak instruments," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2655-2675, November.
  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.
  4. 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.
  5. Carriero, Andrea, 2008. "A simple test of the New Keynesian Phillips Curve," Economics Letters, Elsevier, vol. 100(2), pages 241-244, August.
  6. 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.

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