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Factor analysis in a New-Keynesian model

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Author Info
Andreas Beyer () (European Central Bank, Postfach 16 03 19, D-60066, Frankfurt am Main, Germany)
Roger E. A. Farmer () (UCLA, Dept. of Economics, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-1477, USA)
Jérôme Henry () (European Central Bank, Postfach 16 03 19, D-60066, Frankfurt am Main, Germany)
Massimiliano Marcellino () (IEP-Bocconi University, IGIER and CEPR)

Additional information is available for the following registered author(s):

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, misspecifi- cation 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 identifi- cation 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 European Central Bank in its series Working Paper Series with number 510.

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Length: 52 pages
Date of creation: Aug 2005
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Handle: RePEc:ecb:ecbwps:20050510

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

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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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    Other versions:
  2. Beyer, Andreas & Farmer, Roger E A, 2003. "Identifying the Monetary Transmission Mechanism Using Structural Breaks," CEPR Discussion Papers 4106, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier. [Downloadable!] (restricted)
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  5. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2005. "Robustness of the estimates of the hybrid New Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1107-1118, September. [Downloadable!] (restricted)
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  6. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May. [Downloadable!] (restricted)
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  11. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips Curve," Finance and Economics Discussion Series 2001-30, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  12. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  13. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. George Kapetanios & Massimiliano Marcellino, 2003. "A Comparison of Estimation Methods for Dynamic Factor Models of Large Dimensions," Working Papers 489, Queen Mary, University of London, Department of Economics. [Downloadable!]
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  16. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
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  20. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  21. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March. [Downloadable!] (restricted)
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  22. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January. [Downloadable!] (restricted)
    Other versions:
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. 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!]
  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. [Downloadable!]
  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. [Downloadable!] (restricted)
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