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Factor-GMM Estimation with Large Sets of Possibly Weak Instruments

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  • George Kapetanios

    ()
    (Queen Mary, University of London)

  • Massimiliano Marcellino

    ()
    (IEP-Bocconi University, IGIER and CEPR)

Abstract

This paper analyses the use of factor analysis for instrumental variable estimation when the number of instruments tends to infinity. We consider cases where the unobserved factors are the optimal instruments but also cases where the factors are not necessarily the optimal instruments but can provide a summary of a large set of instruments. Further, the situation where many weak instruments exist is also considered in the context of factor models. Theoretical results, simulation experiments and empirical applications highlight the relevance and simplicity of Factor-GMM estimation.

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Bibliographic Info

Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 577.

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Date of creation: Oct 2006
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Handle: RePEc:qmw:qmwecw:wp577

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Keywords: Factor models; Principal components; Instrumental variables; GMM; Weak instruments; DSGE models;

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Citations

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Cited by:
  1. Dees, S. & Pesaran, M.H. & Smith, L.V. & Smith, R.P., 2008. "Identification of New Keynesian Phillips Curves from a Global Perspective," Cambridge Working Papers in Economics 0803, Faculty of Economics, University of Cambridge.
  2. M. Hashem Pesaran & Elisa Tosetti, 2011. "Large panels with common factors and spatial correlation," Post-Print peer-00796743, HAL.
  3. Beck, Guenter W. & Hubrich, Kirstin & Marcellino, Massimiliano, 2012. "On the importance of sectoral and regional shocks for price setting," IMFS Working Paper Series 63, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  4. Beck, Guenter W. & Hubrich, Kirstin & Marcellino, Massimiliano, 2009. "On the importance of sectoral shocks for price-setting," CFS Working Paper Series 2009/32, Center for Financial Studies (CFS).
  5. Gachet, Ivan & Maldonado, Diego & Pérez, Wilson, 2008. "Determinantes de la Inflación en una Economía Dolarizada: El Caso Ecuatoriano
    [Determinants of Inflation in a Dollarized Economy: The Case of Ecuador]
    ," MPRA Paper 17101, University Library of Munich, Germany.
  6. Huang, Yongfu & Quibria, M. G., 2013. "The global partnership for sustainable development," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Bertille Antoine & Otilia Boldea, 2014. "Efficient Inference with Time-Varying Identification Strength," Discussion Papers dp14-03, Department of Economics, Simon Fraser University.
  8. Travaglini, Guido, 2010. "Supervised Principal Components and Factor Instrumental Variables. An Application to Violent CrimeTrends in the US, 1982-2005," MPRA Paper 22077, University Library of Munich, Germany.
  9. Jennifer Castle & David Hendry, 2013. "Forecasting and Nowcasting Macroeconomic Variables: A Methodological Overview," Economics Series Working Papers 674, University of Oxford, Department of Economics.

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