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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 stimators 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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File URL: http://www.recent.unimore.it/wp/RECent-wp8.pdf
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Bibliographic Info

Paper provided by University of Modena and Reggio E., Dept. of Economics in its series Center for Economic Research (RECent) with number 008.

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Length: pages 39
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:mod:recent:008

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Web page: http://www.recent.unimore.it/
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Keywords: Dynamic Factor Models; Structural VARs; Identification; Fundamentalness;

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References

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  30. 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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