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Opening The Black Box: Structural Factor Models With Large Cross Sections

  • Forni, Mario
  • Giannone, Domenico
  • Lippi, Marco
  • Reichlin, Lucrezia

This paper shows how large-dimensional dynamic factor models are suitable for structural analysis. We argue that all identification schemes employed in structural vector autoregression (SVAR) analysis can be easily adapted in dynamic factor models. Moreover, the “problem of fundamentalness,” which is intractable in SVARs, can be solved, provided that the impulse-response functions are sufficiently heterogeneous. We provide consistent estimators for the impulse-response functions and for ( n , T ) rates of convergence. An exercise with U.S. macroeconomic data shows that our solution of the fundamentalness problem may have important empirical consequences.

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Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 25 (2009)
Issue (Month): 05 (October)
Pages: 1319-1347

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Handle: RePEc:cup:etheor:v:25:y:2009:i:05:p:1319-1347_09
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  9. 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.
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  15. Marco Lippi & Lucrezia Reichlin, 1994. "VAR analysis, non-fundamental representations, Blashke matrices," ULB Institutional Repository 2013/10151, ULB -- Universite Libre de Bruxelles.
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  27. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April.
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