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Identification of Macroeconomic Factors in Large Panels

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Author Info

  • Romain Houssa

    () (Center for Research in the Economics of Development, University of Namur)

  • Lasse Bork

    (Aarhus School of Business, University of Aarhus and CREATES at the University of Aarhus)

  • Hans Dewachter

    (CES, University of Leuven, RSM Rotterdam and CESIFO.)

Abstract

This paper presents a dynamic factor model where the extracted factors and shocks are given a clear economic interpretation. The economic interpretation of the factors is obtained by means of a set of over-identifying loading restrictions, while the structural shocks are estimated following standard practices in the SVAR literature. Estimators based on the EM algorithm are developed. We apply this framework to a large panel of US monthly macroeconomic series. In particular, we identify five macroeconomic factors and discuss the economic impact of monetary policy shocks. The results are theoretically more plausible than those implied by standard SVAR models and indicate a significant role for monetary policy shocks in macroeconomic dynamics.

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File URL: http://www.fundp.ac.be/eco/economie/recherche/wpseries/wp/1010.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by University of Namur, Department of Economics in its series Working Papers with number 1010.

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Length: 42 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:nam:wpaper:1010

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Keywords: Monetary policy; Business Cycles; Factor Models; EM Algorithm.;

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References

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  1. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," Working Papers 284, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • 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.
  2. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2003. "The Generalized Dynamic Factor Model. One-Sided Estimation and Forecasting," LEM Papers Series 2003/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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  12. Bork, Lasse, 2009. "Estimating US Monetary Policy Shocks Using a Factor-Augmented Vector Autoregression: An EM Algorithm Approach," Finance Research Group Working Papers F-2009-03, University of Aarhus, Aarhus School of Business, Department of Business Studies.
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Cited by:
  1. Bork, Lasse, 2009. "Estimating US Monetary Policy Shocks Using a Factor-Augmented Vector Autoregression: An EM Algorithm Approach," Finance Research Group Working Papers F-2009-03, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  2. Valeri Voev, 2009. "On the Economic Evaluation of Volatility Forecasts," CREATES Research Papers 2009-56, School of Economics and Management, University of Aarhus.

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